Final Results

RNS Number : 1667Q

Mattioli Woods PLC

07 September 2017

 

7 September 2017

Mattioli Woods plc

Correction - Final results

The announcement below submitted under RNS Number: 7937P has now been replaced with the following corrections made to the 2016 data column in the table contained in note 6. Earnings per ordinary share:

·     Effect of shares issued during the year ended 31 May 2017 should be 258 (not nil)

·     Basic weighted average number of shares should be 25,060 (not 24,802)

·     Diluted weighted average number of shares should be 25,150 (not 24,892).

All other details remain unchanged.

The full amended text is shown below.

Mattioli Woods plc

("Mattioli Woods", "the Company" or "the Group")

Final results

Mattioli Woods plc (AIM: MTW.L), the specialist wealth management and employee benefits business, today reports its final results for the year ended 31 May 2017. 

Financial highlights

·     Revenue up 17.4% to £50.5m (2016: £43.0m)

·     Recurring revenues of 85.1% (2016: 82.6%)

·     Adjusted EBITDA¹ up 17.2% to £10.9m (2016: £9.3m):

-  Adjusted EBITDA margin¹ of 21.6% (2016: 21.6%)

-  Adjusted EPS ² up 11.4% to 34.1p (2016: 30.6p)

·      EBITDA up 18.0% to £10.5m (2016: £8.9m):

-   EBITDA margin of 20.8% (2016: 20.7%)

-   Basic EPS up 18.7% to 24.8p (2016: 20.9p)

·     Proposed total dividend up 12.8% to 14.1p (2016: 12.5p)

·     Strong financial position with net cash of £23.0m (2016: £29.8m)

Operational highlights and recent developments

·     Organic revenue growth³ of 11.6% (2016: 8.5%):

-  Over 1,200 new client wins

-  115 (2016: 104) consultants at year end

·     Total client assets up 17.5% to £7.77bn (2016: £6.61bn):

-  Gross discretionary AuM up 39.3% to £1.63bn (2016: £1.17bn)

-  £98.4m invested in new Mattioli Woods Structured Products Fund

-  £76.0m of new equity raised by Custodian REIT

·      Acquisition of MC Trustees in September 2016

·      Purchase of 49% of Amati in February 2017, with option to acquire remaining 51%

·      Extending strategic geographic footprint:

-  New Manchester office opened in November 2016

-  Moved to new London office in December 2016

-  Moved to new Glasgow office in May 2017

·      Reducing client costs while maintaining target EBITDA margin

·      New management structure

¹ Earnings before interest, taxation, depreciation, amortisation and acquisition-related costs. 

² Before acquisition-related costs, amortisation and impairment of acquired intangibles, and notional finance income and charges. 

³ Excluding acquisitions completed in the current and prior financial years.  Net organic revenue growth of 12.3% (2016: 11.3%) excluding banking income and acquisitions in the current and prior financial years. 

Commenting on the results, Ian Mattioli MBE, Chief Executive Officer, said:

"I am pleased to report another successful year, with revenue up 17.4% to £50.5m (2016: £43.0m).  Sustained demand for advice and the continued development of our investment and asset management proposition have driven strong new business flows, which together with acquisitions completed in the current and prior financial year increased total client assets under management, administration and advice by 17.5% to £7.77bn (2016: £6.61bn) at the year end. 

"Strong revenue growth translated to growth in Adjusted EPS of 11.4% to 34.1p (2016: 30.6p).  Accordingly, the Board is pleased to recommend the payment of an increased final dividend of 9.4 pence per share (2016: 8.65 pence).  This makes a proposed total dividend for the year of 14.1 pence (2016: 12.5 pence), a year-on-year increase of 12.8%, while maintaining an appropriate level of dividend cover. 

"Acquisitions remain a core part of our growth strategy.  In September 2016, we were pleased to acquire MC Trustees, bringing additional scale and expertise to our pension administration business and the Group's strategic investment in Amati in February 2017 brings a new dimension to our asset management business.  Amati's total funds under management have increased from £120m at acquisition to over £178m today. 

"The five businesses acquired during the previous financial year have integrated well and all have contributed positively to the Group's trading results since acquisition. 

"Regulatory changes continue at considerable pace.  Our immediate focus is on ensuring we are fully compliant with those changes already in train, such as MiFID II, the GDPR and the Senior Managers Regime.  The FCA has highlighted there is weak price competition in the asset management industry and has said it will assess firms' vertical integration and the entire value chain of investing in its upcoming platform market review.  Improving client outcomes and reducing client costs are key objectives of ours and we strongly support the FCA's objectives of increased transparency and better alignment of interests between fund managers and investors. 

"As part of our commitment to developing the Group's governance and management structures we have created a new Senior Executive Team to execute the strategy determined by the Board.  We have also reduced the size of our Board to eliminate duplication between it and the Senior Executive Team, ensuring clearer lines of responsibility and creating a balanced Board of three executive directors and three non-executive directors. 

"Our focus remains on ensuring the Group addresses our clients' changing needs and we continue to broaden our proposition through advice and innovative product development such as the Mattioli Woods Structured Products Fund, organically and by acquisition.  We believe our capabilities as trusted adviser, administrator, product provider and asset manager allow us to deliver improved and sustainable client outcomes.  I look forward to us building upon our success over the last 25 years to deliver further value for our shareholders."

For further information please contact:

Mattioli Woods plc
Ian Mattioli MBE, Chief Executive Officer
Nathan Imlach, Chief Financial Officer	Tel: [phone]
	www.mattioliwoods.com

Canaccord Genuity Limited
Sunil Duggal, Investment Banking
Andrew Buchanan, Corporate Broking	Tel: [phone]
	www.canaccordgenuity.com

Media enquiries:

Camarco
Ed Gascoigne-Pees	Tel: [phone]
	www.camarco.com

Analyst presentation

There will be an analyst presentation to discuss the results at 09:30am today at Canaccord Genuity Limited, 88 Wood Street, London, EC2V 7QR. 

Those analysts wishing to attend are asked to contact Ed Gascoigne-Pees at Camarco on [phone] or at [e-mail]. 

Strategic report

Chairman's statement

This is my first statement to shareholders since being appointed as the Group's new Chairman at our Annual General Meeting in October 2016.  On behalf of all of my colleagues, I would like to thank my predecessor and co-founder of Mattioli Woods, Bob Woods, for his immense contribution in building our business into one of the UK's leading providers of wealth management and employee benefit services. 

Review of the year

I am delighted to report another year of growth, driven by a strong flow of organic new business and continued demand for advice from clients, which together with acquisitions completed in this and the prior financial year has seen the Group achieve a significant milestone in generating annual revenues of over £50m. 

We have enjoyed further growth in our investment and asset management business, with gross discretionary assets under management⁴ ("AuM") increasing by £460m during the year, with £190m of new monies invested in our discretionary portfolio management service.  The Mattioli Woods Structured Products Fund was launched in November 2016 and its value now exceeds £100m.  Custodian REIT, the UK real estate investment trust managed by our subsidiary Custodian Capital, raised £76m of new monies during the year and now has a market capitalisation of almost £400m. 

One of our stated aims is to lower the cost of the range of services we provide to clients, while growing a long-term sustainable business.  We were delighted to reduce the custody charge for all those clients using our core investment platform from 1 August 2017, which followed our previous announcement that the terms of the Investment Management Agreement between Custodian Capital and Custodian REIT have been amended to secure both a cost reduction for investors in Custodian REIT and an important long-term revenue stream for the Group. 

Organic revenue growth of 11.6% (2016: 8.5%) or £4.4m was driven by our largely home-grown consultancy team, further accelerated by growth in our investment and asset management and property businesses.  We continue to see demand for advice from clients, driven by lifestyle, increasing longevity, tax and other legislative changes, including the pension freedoms that introduced a major shift in how people can access their pensions, which in turn has driven further growth in pension consultancy and administration revenues. 

Acquisitions continue to be a core part of our growth strategy.  Our purchase of 49% of Amati Global Investors Limited ("Amati"), which we announced in February, is an exciting extension to our asset management business.  Amati's total AuM has increased from £120m at acquisition to over £178m today. 

In September 2016 we were pleased to announce the acquisition of MC Trustees, which is an excellent fit with our existing pension business and has contributed positively to the Group's trading result for the year.  We believe further consolidation within our core markets remains likely and our strong balance sheet gives us the flexibility to make further value-enhancing acquisitions. 

Strong revenue growth in the year translated into growth in Adjusted EPS of 11.4% to 34.1 pence (2016: 30.6 pence).  We are proud of the strong shareholder returns we have delivered and remain committed to growing the dividend, while maintaining an appropriate level of dividend cover.  Accordingly, the Board is pleased to recommend the payment of an increased final dividend of 9.4 pence per share (2016: 8.65 pence).  This makes a proposed total dividend for the year of 14.1 pence (2016: 12.5 pence), a year-on-year increase of 12.8%. 

4 Excludes assets under management by Amati Global Investors Limited. 

The market

The past 12 months have seen changes in many respects.  The General Election result created fresh speculation around the shape of 'Brexit' and regulatory changes continue at considerable pace.  Our immediate focus is on ensuring that we are fully compliant with those changes already in train, such as the Markets in Financial Instruments Directive II ("MiFID II"), the General Data Protection Regulations ("GDPR") and the Senior Managers Regime ("SMR"). 

The Financial Conduct Authority ("FCA") published its final report on the asset management market in June 2017, confirming its assessment that there is weak price competition in the asset management industry.  In addition, the FCA has said it will assess firms' vertical integration and the entire value chain of investing, as well as the platform market, in its upcoming platform market review. 

Improving client outcomes and reducing client costs are key objectives of ours and we strongly support the FCA's objectives of increased transparency and better alignment of interests between fund managers and investors. 

Our strategy

Our strategy remains focused on the pursuit of strong organic growth, supplemented by strategic acquisitions that enhance value and broaden or deepen our expertise and services.  Our distribution channels include our consultancy team, a nationwide network of professional introducers and, increasingly, our workplace financial educational programmes. 

Investment in our bespoke pension administration and wealth management platform continues in line with expected spend, while we continue to review the possibility of moving to a hosted IT infrastructure, which may offer improved data security, business continuity and scalability for future growth. 

Construction of our new central Leicester office, which will provide our staff with a modern working environment and capacity for further growth, remains scheduled to complete around the end of this calendar year, with the move from our existing offices scheduled for the second quarter of 2018.  Costs are in line with expectations. 

Our focus is on ensuring we continue to address our clients' changing needs and our ambition is to see our brand become an even stronger force in the UK financial services sector. 

Our people

As an Investors in People company we are committed to developing our people and building the capacity to deliver sustainable growth.  In the last financial year we moved into larger premises in London and opened a new office in Manchester, strengthening Mattioli Woods' position in the North West following the acquisition of Preston-based financial advisory firm Taylor Patterson in the prior financial year. 

I would like to thank all our staff for their continued commitment, enthusiasm and professionalism in dealing with our new and existing clients' affairs.  

Governance and the board

The Board is committed to developing the corporate governance and management structures of the Group to ensure they continue to meet the changing needs of the business.  Following my appointment as the Group's first independent Non-Executive Chairman, we carried out internal and external reviews of the effectiveness of the Board, its sub-committees and the Group's senior executive management framework.  We have created a new Senior Executive Team ("SET^GO") to execute the strategy determined by the Board, bringing together a senior team with responsibility for all our key operational areas.  In addition, we have reduced the size of our Board to eliminate duplication between the Board and SET^GO, ensuring clearer lines of responsibility within the management team and creating a balanced Board of three executive directors and three non-executive directors. 

As part of the implementation of these changes, Mark Smith and Alan Fergusson stepped down as directors in August 2017, with both remaining key members of SET^GO. 

We believe these changes give the business the optimal management structure to secure continued growth. 

Shareholders

We are fortunate to have a number of supportive institutional shareholders with a significant investment in the Group.  We welcome opportunities to talk to all shareholders, large and small, and we will continue to maintain a regular and constructive dialogue with them, while seeking to broaden our shareholder base. 

Outlook

We were delighted to see Bob and Ian recognised for their services to business and the community in Leicester through the award of MBEs in the Queen's New Year's Honours List. 

Throughout its 25 year history, Mattioli Woods has demonstrated that in both good and bad economic conditions we have a robust business model, which delivers organic growth by winning new clients and developing new revenue streams, and also through the careful acquisition of similar or complementary businesses. 

Our focus remains on ensuring the Group addresses our clients' changing needs and we continue to broaden our proposition through advice, innovative product development, organically and by acquisition.  We believe our vertically-integrated models for wealth management and employee benefits, blending our capabilities as trusted adviser, administrator, product provider and asset manager, allow us to deliver improved and sustainable client outcomes, and we look forward to continuing our success over the next 25 years.  

Joanne Lake

Chairman

4 September 2017

 

Strategic report

Chief Executive's review

Introduction - still at the beginning of our journey…after 25 years

I am pleased to report another successful year, with revenue for the 12 months ended 31 May 2017 up 17.4% to £50.5m (2016: £43.0m).  We are over half way towards our medium term goal of growing revenues to £100m and we continue to focus on delivering great outcomes for our clients, with one of our key aims being to reduce their total expense ratios ("TERs") while maintaining our target profit margin. 

Sustained demand for advice, driven by our clients' desire for a better understanding of their financial position, and the continued development of our investment and asset management proposition have driven strong new business flows, which together with acquisitions completed in the current and prior financial year increased total client assets under management, administration and advice by 17.5% to £7.77bn (2016: £6.61bn) at the year end. 

Organic growth was supplemented by £1.2m of revenues generated by the MC Trustees pension administration business acquired in September 2016, plus full-year revenues of £7.1m (2016: £5.2m) from the five businesses acquired in the prior year.  

EBITDA⁵ was up 18.0% to £10.5m (2016: £8.9m), maintaining EBITDA margin at 20.8% (2016: 20.7%) despite further investment in the infrastructure of our business and an expected fall in banking revenues.  

Adjusted EPS⁶ increased 11.4% to 34.1p (2016: 30.6p), while basic EPS was up 18.7% to 24.8p (2016: 20.9p), with growth in operating profits stated after £0.4m (2016: £0.3m) of acquisition-related costs and £0.3m (2016: £0.5m) of notional finance charges on the unwinding of discounts on long-term provisions.  The effective rate of taxation was 16.9% (2016: 16.6%) due to the reversal of deferred tax liabilities on acquired intangibles following further cuts in the substantively enacted rate of UK corporation tax. 

Our success is based upon the delivery of quality advice, services and products, growing our clients' assets and enhancing their financial outcomes.  The foundation of this success is the development of our people and I am delighted we have created a business our clients are proud to be a part of, our people feel proud to work for and is one that recognises and rewards talent and hard work. 

Our recent achievements have been recognised with a number of industry awards for individual and corporate achievements nationally and locally, including Best Corporate Pensions Advice Firm at the Retirement Planner Awards 2017, as well as being highly commended with a 5-star SSAS rating at the Moneyfacts Awards 2017.

In addition to being an Investors in People organisation, the Group continues to be recognised for creating opportunities for young people and recently won Apprenticeship Employer of the Year at the 2017 Leicester Apprenticeship Hub Graduation Ceremony.  

⁵ Earnings before interest, taxation, depreciation and amortisation. 

⁶ Before acquisition-related costs, notional finance costs and amortisation and impairment of intangible assets arising on acquisitions. 

Industry overview

Mattioli Woods operates within the UK's financial services industry, which is subject to the effects of volatile markets and economic conditions.  In recent years we have seen a period of unprecedented change in legislation and regulation.  As a result of changing customer needs the market for our services continues to grow, with there now estimated to be a record five million Britons paying higher or additional rate income tax⁷.  We continue to be proactive in relation to the opportunities this creates, with our specialists dedicated to keeping up with the pace of change.  Our entrepreneurial model allows us to adapt and advise our clients accordingly. 

Our markets are highly fragmented and serviced by a wide range of suppliers offering diverse services to both individual and corporate clients.  These markets remain highly competitive, with recent regulatory changes, including the abolition of provider commissions on corporate pensions in April 2016 and increased capital requirements for SIPP operators from 1 September 2016, driving further consolidation across the industry.  

The Financial Advice Market Review ("FAMR") published by the FCA and HM Treasury in March 2016 made a series of recommendations designed to tackle barriers to consumers engaging with financial advice and help the industry develop more cost-effective ways of delivering advice, particularly through the use of technology, while the FCA's recent review of the asset management market highlighted its concerns over pricing. 

We continue to invest in the development of our IT platform and anticipate that the entry of new competitors with innovative technology (such as 'robo-advice') may drive some margin compression in the wider market.  I expect this, coupled with regulatory and market concerns around the cost of financial services, to further validate our vertically-integrated model, where seeking operational efficiencies in administration and reducing investment management and administration costs are key elements of our drive to reduce our clients' TERs, while maintaining fair and sustainable profit margins for our shareholders. 

7 Source: HM Revenue & Customs - UK Income Tax Liabilities Statistics, 2016-17 projections. 

Our services

Our core pension and wealth management offering serves the higher end of the market, including controlling directors and owner-managed businesses, professionals, executives and retirees.  Our broad range of employee benefit services is targeted towards medium-sized and larger corporates.  In recent years, the Group has developed a broader wealth management proposition, grown from its strong pensions advisory and administration expertise, with the Group's income now derived from four key service lines:

·     Investment and asset management;

·     Pension consultancy and administration;

·     Employee benefits; and

·     Property management.

We aim to operate a seamless structure, allowing us to cover all aspects of wealth management and employee benefits, without confusing strategy for individual service lines, such as our advice-led SSAS and SIPP proposition. 

Medium-term goals

Our vision is to create a long-term sustainable business, built on integrity and trust, and delivered with passion.  Throughout our first 25 years we have stayed true to our core values, putting our clients at the heart of everything we do and doing what is right to build long-term shareholder value.  To assist in the achievement of our long-term objectives, in early 2014 we announced the following medium-term goals:

·     Revenue                                                                            £100m

·     Assets under management, administration and advice      £15bn

·     EBITDA margin                                                                  20%

We are making strong progress towards these goals and remain a business built on the integrity and expertise of our people.  We will continue to focus on delivering great outcomes for our clients, with one of our key aims being to grow and preserve their investment assets. 

SET^GO

The Board and Senior Executives have long debated the structure of our rapidly growing group.  When we announced our medium-term goals to the market we had annual revenues of £23m and assets under management, administration and advice of £3.6bn. 

The business has changed from a young, entrepreneurial business into what I now call 'a small, friendly corporate'.  Last year, my longstanding business partner Bob Woods stepped down after ten years in the role of Executive Chairman to focus on his client portfolio, new business development and acting as an ambassador for Mattioli Woods.  Bob and I have now worked closely together for over 30 years. 

With Joanne Lake stepping into the Non-Executive Chairman role, it was a timely opportunity to look closely at the structure of the Group.  We added to the executive team with the appointments of Sara Andrews as Chief Business Officer and Simon Gibson as Chief Investment Officer and created SET^GO, our Senior Executive Team, with the 'go' highlighting that we are set, ready and moving forward.  The introduction of SET^GO gives all our people - clients, shareholders, employees and suppliers - a very clear operational structure that is enhancing our management of the Company and will enable it to further grow and develop.  The new SET^GO structure combined with a smaller Board is logical, practical and in all our people's best interests. 

Mark Smith and Alan Fergusson stepped down from the Board in August 2017, continuing in their full-time executive roles as key members of the SET^GO team.  Mark's and Alan's experience adds great value to the Group and both have given their support to these changes, for which I am truly grateful - it shows their long-term commitment to realising our ambitions. 

Assets under management, administration and advice

Total client assets under management, administration and advice increased by 17.5% to £7.77bn at 31 May 2017 (2016: £6.61bn) as follows:

Assets under management, administration and advice8	SIPP and SSAS9 £m	Employee benefits £m	Personal and other pension £m	Total £m
As at 1 June 2016	3,996.1	1,158.2	1,451.6	6,605.9
Acquisition of MC Trustees10	466.5	-	-	466.5
Net inflow/(outflow), including market movements	568.7	(55.9)	186.5	699.3
As at 31 May 2017	5,031.3	1,102.3	1,638.1	7,771.7

The acquisition of MC Trustees during the year added £466.5m of client assets, with a net inflow of £699.3m during the year comprising:

·     An increase of £568.7m in SIPP and SSAS funds under trusteeship, following a period of strong investment returns and net organic growth of 7.6% in the number of schemes being administered at the year end.  We enjoyed 11.8% net organic growth in direct¹¹ schemes, with 1.6% net organic growth in the number of schemes the Group operates on an administration-only basis (excluding the acquisition of MC Trustees). 

·     A £186.5m increase in other personal and pension assets; and

·     A £55.9m fall in the value of assets held in the corporate pension schemes advised by our employee benefits business, following the loss of a large client in the North Sea oil and gas industry, which has gone through a difficult period of cost-cutting and redundancies.  It should be noted that revenues in our employee benefits business are not linked to the value of client assets in the same way that certain of our wealth management revenue streams are. 

We have extended our asset management business through our purchase of 49% of Amati, an award-winning specialist fund management business based in Edinburgh, focusing on UK small and mid-sized companies.  Amati is the manager of the TB Amati UK Smaller Companies Fund; two AIM Venture Capital Trusts (Amati VCT plc and Amati VCT 2 plc); and an AIM IHT portfolio service.  Amati's total AuM had increased from £120m at acquisition to over £165m at the year end.  We anticipate further growth in the value of Amati's AuM, including the boards of the VCTs plans to launch a joint fundraising to raise around £20m between the two VCTs later this year. 

Mattioli Woods has the option to acquire the remaining 51% of Amati in the two years commencing 6 February 2019 for a mixture of cash and Mattioli Woods' ordinary shares. 

⁸ Certain pension scheme assets, including clients' own commercial properties, are only subject to a statutory valuation at a benefit crystallisation event. 

⁹ Value of funds under trusteeship in SIPP and SSAS schemes administered by Mattioli Woods and its subsidiaries. 

¹⁰ Value as at 31 May 2017. 

 ¹¹ SIPP and SSAS schemes where the Group acts as pension consultant and administrator. 

Segmental review

Investment and asset management

Investment and asset management revenues generated from advising clients on both pension and personal investments increased 23.5% to £21.0m (2016: £17.0m), representing 41.6% (2016: 39.6%) of total Group revenues.  Income from both initial and ongoing portfolio management charges increased to £10.7m (2016: £8.8m), as the value of clients' assets in discretionary portfolios increased 29.5% to £1.14bn (2016: £0.88bn).  The Group's gross discretionary assets under management, including Custodian REIT, the FP Mattioli Woods Balanced Fund (formerly the Thoroughbred OEIC) and the Mattioli Woods Structured Products Fund totalled £1.63bn (2016: £1.17bn) at the year end.  

The Mattioli Woods Structured Products Fund was launched in November 2016 and has raised over £100m to date, generating fund management charges of £0.2m during the year.  The fund has been designed around our core objective of delivering sustainable long-term returns to clients while lowering their costs and offers investors the benefits of collateralisation, instant diversification, continuous availability and liquidity. 

Adviser charges based on the value of assets under advice were £10.1m (2016: £8.2m).  The growth in funds under management and advice continues to enhance the quality of earnings through an increase in recurring revenues, with the proportion of investment and asset management revenues which are recurring being 81.0% (2016: 81.7%).  As with other firms, these income streams are linked to the value of funds under management and advice, and are therefore affected by the performance of financial markets. 

Pension consultancy and administration

Retirement planning is often central to our clients' wealth management strategies.  We maintain our technical edge through our widely acknowledged understanding of UK pension legislation, which allows our consultancy team to deliver meaningful guidance to our clients.  Our client base primarily comprises owner-managers, executives and members of the professions.  Additional fees are generated from the provision of specialist consultancy services.  

In July 2017, the work and pensions secretary announced that individuals born between 1970 and 1978 will now have to wait an extra year, until they are 68, to claim their state pension.  While continual change (and talk of change) to the UK pensions system may work against the Government's aim to ensure all individuals save for their retirement, I expect it to drive sustained demand for advice, benefiting our core pensions business. 

Pension consultancy and administration revenues were up 13.9% to £18.9m (2016: £16.6m), representing 37.4% (2016: 38.6%) of Group revenues of which 92.6% (2016: 82.6%) were recurring, with additional one-off revenues earned in the prior year following significant changes in pension legislation.  The growth in revenues was driven by the total number of SIPP and SSAS schemes administered by the Group increasing 27.3% to 10,021 (2016: 7,872) at the year end, with the acquisition of MC Trustees during the year adding 1,554 schemes. 

Fees for direct pension consultancy and administration, where the Group deals directly with the client in all areas associated with their pension affairs, increased 11.0% to £14.1m (2016: £12.7m), with sustained demand for advice as more people look to take advantage of pension freedoms.  The number of direct schemes administered by the Group increased 11.8% to 5,140 (2016: 4,598), with 764 (2016: 665) new schemes gained in the year (excluding acquisitions), representing 16.6% (2016: 17.3%) of the number of schemes at the start of the year. 

Our focus remains on the quality of new business, with an average new SIPP value of over £0.3m and average new SSAS value of over £1.0m.  We also maintained strong client retention, with an external loss rate¹² of 2.1% (2016: 2.4%) and an overall attrition rate¹³ of 3.6% (2016: 3.6%).  

Third party administration fees increased 31.4% to £4.6m (2016: £3.5m), with £1.2m of revenues generated by MC Trustees during the period.  The number of SSAS and SIPP schemes the Group operates on an administration-only basis increased to 4,881 (2016: 3,274) at the year end.  In recent years, Mattioli Woods has been appointed to operate or wind-up a number of distressed SIPP portfolios following the failure of the previous operator.  Lost schemes include the planned transfer of members of these distressed SIPP portfolios to alternative arrangements, with the 265 schemes lost during the period being more than offset by acquisition of MC Trustees' portfolio and organic growth. 

Strong growth in pension fees was offset by an anticipated fall of £0.2m in banking revenues to £0.2m (2016: £0.4m), following the cut in the Bank of England base rate to a historic low of 0.25% in August 2016. 

The introduction of increased regulatory capital requirements for SIPP operators on 1 September 2016 and the accelerating pace of consolidation within the SIPP market is putting some smaller operators under increasing pressure to join forces with larger firms.

¹² Direct schemes lost to an alternative provider as a percentage of average scheme numbers during the period. 

¹³ Direct schemes lost as a result of death, annuity purchase, external transfer or cancellation as a percentage of average scheme numbers

     during the period.    

Property management

Property management revenues increased 26.8% to £5.2m (2016: £4.1m) or 10.3% of total revenue (2016: 9.5%), of which 90.4% (2016: 91.6%) represented recurring annual management charges.  Our subsidiary Custodian Capital is the external fund manager to Custodian REIT plc and also manages properties on behalf of pension schemes and private clients, managing an overall portfolio of property investments with a net asset value of £445.0m (2016: £328.1m) at the year end.  The majority of our property management revenues are derived from the services provided to Custodian REIT, which now has a market capitalisation of almost £400m and offers one of the highest yields¹⁴ among its UK property investment company peer group, coupled with the potential for capital growth from a balanced portfolio of real estate assets. 

Custodian Capital manages our "Private Investors Club", which offers alternative investment opportunities to suitable clients by way of private investor syndicates.  This continues to be well received by clients, with £20.6m (2016: £9.9m) invested in seven (2016: eight) new syndicates completed during the year. 

As part of our strategy to create a single, strong identity across our Group, Custodian Capital will be renamed Mattioli Woods Capital in the first half of the 2018 calendar year. 

¹⁴ Dividend yield of 5.6% (peer group average of 4.9%) per Numis Securities Limited Datasheet, 1 September 2017. 

Employee benefits

At a time when the employee benefits market is going through extensive transition, we recognise the value that having a full employee benefits offering adds to the Group, allowing us to realise synergies between it and our wealth management business, with revenues of £0.7m (2016: £0.6m) generated in cross referrals between the two divisions during the last financial year. 

Employee benefits revenues were up 1.9% to £5.4m (2016: £5.3m), representing 10.7% of total revenue (2016: 12.3%).  I believe this is a major achievement, following the rebasing of our employee benefits business to create the platform to optimise our position in this market.  The move to a fee-based proposition has been well-received by corporate clients, with 75.9% (2016: 78.7%) of employee benefits revenues recurring, and I expect our Executive Financial Counselling, Boardroom Pay and Financial Education initiatives to continue to gather pace. 

There is rising recognition from organisations of the importance of investing in employee benefits.  Employers are increasingly encouraging staff wellbeing and retirement savings, which we expect to drive  a period of steady growth in the UK employee benefits market, and I am delighted over 100 new corporate clients were attracted to the Group's range of employee benefits services during the year. 

In addition, the employee benefits work of our Aberdeen business is stabilising following several years of localised contraction in the oil and gas industry.  Our membership of the Worldwide Broker Network, on which Alan Fergusson serves on the board, is driving an increasing number of referrals and we have grown our consultancy team to capitalise on these new opportunities. 

The FAMR highlighted concerns around a developing 'advice gap', driven by:

·     Increasing responsibility on individuals to manage their own financial affairs;

·     The ability of individuals to pay for advice; and

·     Advice needs arising from pensions' liberalisation and auto-enrolment. 

We believe the Government's emphasis on workplace advice presents new opportunities for us to realise further synergies between our employee benefits and wealth management businesses. 

Key performance indicators

The directors consider the key performance indicators ("KPIs") for the Group are as follows:

Strategy/objective	Performance indicator
Organic growth and growth by acquisition	Revenue - total income (excluding VAT) from all revenue streams.
Operating efficiency	Adjusted EBITDA margin - profit generated from the Group's operating activities before financing income or costs, taxation, depreciation, amortisation and acquisition-related costs, divided by revenue.
Shareholder value and financial performance	Adjusted EPS - total comprehensive income for the year, net of taxation, attributable to equity holders of the Company, adjusted to add back acquisition-related costs, notional finance charges on the unwinding of discounts on long‑term provisions and the amortisation of acquired intangible assets, divided by the number of ordinary shares in issue.
Growth in the value of assets under management, administration and advice	Assets under management, administration and advice - the value of all client assets the business gives advice upon, manages or administers.
Excellent client service and retention	Client loss rate - the number of direct SSAS and SIPP schemes lost as a result of death, annuity purchase, external transfer or cancellation as a percentage of average scheme numbers during the period.
Financial stability	Debtors' days - this is the average number of days' sales outstanding in trade receivables at any time.
Financial stability	Surplus on regulatory capital requirement - this is the aggregate surplus on the total regulatory capital requirement of the Group.

Financial performance and future developments

Group results

Revenues were up 17.4% to £50.5m (2016: £43.0m), with sustained demand for the Group's services.  We are particularly pleased with the continued development of our broader wealth management proposition and the integration of recently acquired businesses during the year.  The mix between the Group's key revenue streams changed during the period, summarised as follows: 

·     41.6% investment and asset management (2016: 39.6%);

·     37.4% pension consultancy and administration (2016: 38.6%);

·     10.7% employee benefits (2016: 12.3%); and

·     10.3% property management (2016: 9.5%). 

EBITDA increased 18.0% to £10.5m (2016: £8.9m), with EBITDA margin of 20.8% (2016: 20.7%) despite further investment in the infrastructure and sustainability of our business, a fall in banking revenues and costs associated with the completion and integration of recent acquisitions. 

To facilitate a like-for-like comparison with prior years, acquisition costs of £0.4m (2016: £0.3m) incurred on acquisitions during the year have been added back in calculating adjusted EBITDA and adjusted profit before tax.  Adjusted EBITDA¹⁵ increased 17.2% to £10.9m (2016: £9.3m), while adjusted EBITDA margin was 21.6% (2016: 21.6%). 

Previously, I set out our aim to reduce the TERs incurred by clients and I see both a market expectation and possible regulatory or legislative pressure to reduce product costs, which could bring about some continued pressure on sector margins.  We plan to manage this by realising operational efficiencies through the development of our IT platform and securing further reductions in investment management and platform costs. 

¹⁵ Adding back £0.4m (2016: £0.3m) of acquisition-related costs. 

Net finance costs

The Group has maintained a positive net cash position throughout the year, with net finance costs of £0.2m (2016: £0.3m) due to the impact of £0.3m (2016: £0.5m) of notional finance charges on the unwinding of discounts on long‑term provisions.  

Taxation

The effective rate of taxation on profit on ordinary activities of 16.9% (2016: 16.6%) was again below the standard rate of tax primarily due to the recalculation of deferred tax liabilities on acquired intangibles following a cut in the substantively enacted rate of UK corporation tax from 18% to 17%.  The net deferred taxation liability carried forward at 31 May 2017 was £2.8m (2016: £3.0m).

Earnings per share and dividend

Adjusted EPS¹⁶ was up 11.4% to 34.1p (2016: 30.6p) with strong revenue growth and an increase in operating profits.  Basic EPS increased 18.7% to 24.8p (2016: 20.9p), with a fall in the value of add backs to adjusted EPS as a result of a fall in notional finance charges on the unwinding of discounts on long‑term provisions.  Diluted EPS increased 18.2% to 24.7p (2016: 20.9p), with the exercise of 226,841 options issued under the Company's share option plans during the year and the issue of 256,061 new shares as consideration for acquisitions. 

¹⁶ Before acquisition-related costs, amortisation and impairment of acquired intangibles, and notional finance income and charges. 

Dividends

The Board is pleased to recommend the payment of an increased final dividend of 9.4 pence per share (2016: 8.65 pence).  This makes a proposed total dividend for the year of 14.1 pence (2016: 12.5 pence), a year-on-year increase of 12.8% (2016: 19.0%), demonstrating our desire to deliver value to shareholders and confidence in the outlook for our business.  The Board remains committed to growing the dividend, while maintaining an appropriate level of dividend cover.  If approved, the final dividend will be paid on 27 October 2017 to shareholders on the register at the close of business on 22 September 2017. 

Cash flow

Cash generated from operations fell to £10.5m or 100% of EBITDA (2016: £11.8m or 133%).  A £1.8m increase in cash flows from operating activities before changes in working capital and provisions to £12.3m (2016: £10.5m) was offset by a £1.8m increase in the Group's working capital requirement (2016: decrease of £1.3m) following a £2.0m (2016: £0.5m) increase in trade and other receivables and a £1.5m decrease (2016: £0.2m increase) in provisions after the settlement of contingent deferred consideration on acquisitions and cash settled share-based payment awards during the year.  The impact of the increase in receivables and decrease in provisions was partially offset by a £1.7m (2016: £1.6m) increase in trade and other payables, which was primarily due to:

·     A £1.3m increase in accrued staff bonuses at the year end, following another successful year and an increase in headcount across the Group; and

·     A £0.6m increase in trade payables at the year end, with a £0.9m stage payment on the New Walk office development outstanding at the year end. 

The increase in trade and other receivables was due to:

·     A £0.9m increase in accrued income and prepayments as a result of the increase in assets under management and advice during the year;

·     A £0.7m increase in other receivables following an increase in property insurance premiums incurred by the Group to be recharged to clients at the year end; and

·     A £0.4m increase in trade receivables following strong growth in direct pension consultancy and administration fees. 

Net cash at 31 May 2017 was £23.0m (2016: £29.8m), with £2.8m of initial cash consideration paid and £0.2m cash acquired on the two transactions completed during the year, plus £2.3m (2016: £1.1m) of contingent deferred consideration paid in cash on historic acquisitions.

Outstanding trade receivables fell to 40 days' sales (2016: 46 days), with an increase in investment and asset management revenues and a continued focus on credit control, while trade payables remained at 52 days' purchases (2016: 52 days). 

Capital expenditure in the year was £9.1m (2016: £1.7m), with the most significant costs being £7.4m incurred on the development of the Group's new offices in Leicester, £1.1m investment in new computer hardware, software and office equipment and £0.5m on the purchase of new company cars following continued expansion of the consultancy team.  The continued development of the Group's technology infrastructure is a key part of our strategy and although taking longer than we initially anticipated, investment in our bespoke pension administration and wealth management platform continues in line with expected spend.  We are reviewing the possibility of moving to a hosted IT infrastructure, which may offer improved data security, business continuity and scalability for future growth. 

Bank facilities

The Group does not have an overdraft facility due to the headroom the Group's current cash balances provide on its working capital requirements.  Management will continue to review the level of bank facilities the Group may require going forward. 

Capital structure

The Group's capital structure is as follows:

	2017 £000	2016 £000
Net cash	(22,979)	(29,809)
Shareholders' equity	72,595	65,581
Capital employed	49,616	35,772

The Group continues to maintain a net cash position, with net cash balances falling to £23.0m (2016: £29.8m) due to capital expenditure during the year, coupled with the initial cash outflows on the acquisition of MC Trustees and the Group's investment in Amati. 

Regulatory capital

The Board considers it prudent for the Group to target headroom of circa 25% over the FCA regulatory capital requirement.  The Group's regulatory capital requirement has increased in recent years, and in addition its capital is eroded when it makes acquisitions due to the requirement for intangible assets arising on acquisition to be deducted from Tier 1 Capital.  

The Group continues to enjoy significant headroom on its increased regulatory capital requirement following the acquisition of MC Trustees and its investment in Amati during the year, allowing us to pursue further acquisition opportunities. 

 

Acquisitions

We have invested £46m since our admission to AIM in 2005 in bringing 20 businesses or client portfolios into the Group, developing considerable expertise and a strong track record in the execution and subsequent integration of such transactions. 

In September 2016, we were pleased to acquire MC Trustees, bringing additional scale and expertise to our pension administration business.  MC Trustees is a great fit culturally and strategically, serving a similar client base to the Group's existing business, while complementing our existing operations. 

The Group's strategic investment in Amati announced in February 2017 brings a new dimension to our asset management business, which we expect to deliver significant synergies for each business. 

The five businesses acquired during the previous financial year have integrated well and all have contributed positively to the Group's trading results since acquisition, increasing earnings and enhancing value.  With increasing complexity and continuing consolidation across the key markets in which we operate, we expect there will be further opportunities to accelerate our strong organic growth by acquisition. 

Relationships

The Group's performance and value to our shareholders are influenced by other stakeholders, principally our clients, suppliers, employees, the Government and our strategic partners.  Our approach to all these parties is founded on the principle of open and honest dialogue, based on a mutual understanding of needs and objectives. 

Relationships with our clients are managed on an individual basis through our client relationship managers and consultants.  Employees have performance development reviews and employee forums also provide a communication route between employees and management, including SET^GO.  Mattioli Woods also participates in trade associations and industry groups, which give us access to client and supplier groups and decision-makers in Government and other regulatory bodies.  Mattioli Woods is a member of the Association of Member-directed Pension Schemes and the Quoted Companies Alliance. 

Resources

The Group aims to safeguard the assets that give it competitive advantage, including its reputation for quality and proactive advice, its technical competency and its people.  

Our core values provide a framework for integrity, leading to responsible and ethical business practices.  Structures for accountability from our administration and consultancy teams through to SET^GO and the Group's Board are clearly defined.  The proper operation of the supporting processes and controls are regularly reviewed by the Audit, Risk and Compliance Committee and take into account ethical considerations, including procedures for 'whistle-blowing'. 

Our people

As we continue to grow, our previous "Small to Big" employee engagement theme has evolved into our new "Big to Better" initiative, which will enable us to retain our core principles as a business built on the integrity, expertise and passion of our people.  Our total headcount at 31 May 2017 had increased to 568 (2016: 504) and we continue to invest in our graduate recruitment programme, with 25 (2016: 25) new graduates and 16 (2016: 15) apprentices joining the Group during the year.  We are also developing programmes for 'life served' people seeking exciting opportunities for a change in career or a return to work.  We continue to expand our consultancy and technical teams to take advantage of new business opportunities, with the number of consultants having increased to 115 (2016: 104) at the year end.  

With continued growth in our investment and asset management business, and to support our growth ambitions, we strengthened our SET^GO team through the appointments of Simon Gibson as the Group's Chief Investment Officer and Sara Andrews as Chief Business Officer.  Simon is a well-respected fund manager with over 30 years' investing experience, while Sara brings more than 25 years' experience of developing people and managing change within fast-growing businesses. 

We also welcomed 26 employees to the Group as part of the MC Trustees acquisition.  As an Investors in People company we are committed to developing our people and building the capacity to deliver sustainable growth.  Recent expansion has seen us move into larger premises in London and Glasgow, and open a new office in Manchester. 

We enjoy a strong team spirit and facilitate employee equity ownership through the Mattioli Woods plc Share Incentive Plan ("the Plan") and other share schemes.  At the year end the proportion of eligible staff invested via the Plan remained high at 58% (2016: 61%) and we will continue to encourage broader participation in the Plan. 

Forward-looking statements

The strategic report is prepared for the members of Mattioli Woods and should not be relied upon by any other party for any other purpose.  Where the report contains forward-looking statements these are made by the directors in good faith based on the information available to them at the time of their approval of this report.  Consequently, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risks underlying such forward-looking statements and information.  The Group undertakes no obligation to update these forward-looking statements. 

Principal risks and uncertainties

There are a number of potential risks which could hinder the implementation of our strategy and have a material impact on our long‑term performance.  These arise from internal or external events, acts or omissions which could pose a threat to the Group. 

We are proud of our consistently high client retention rate, but continue seeking ways to strengthen this.  We believe the most significant risk we face is potential damage to our reputation as a result of poor client service and we are determined not to let standards slip.  We address this through ongoing quality control procedures and the provision of regular training for all our staff. 

Pension regulations will continue to be reviewed.  Future changes may not produce an environment that is advantageous to the Group and any changes in regulation may be retrospective.  To address this risk, we are committed to ensuring that our views are expressed during consultation exercises and that we respond positively and rapidly to new regulations. 

We also recognise that a significant skills shortage would represent a risk to growth.  We are mitigating this risk through investment in our graduate, apprentice and life served recruitment programmes and by providing incentives to motivate and retain our existing employees.  Throughout the Group, we have introduced Financial Assess, a web-based training programme provided through the Chartered Insurance Institute, written specifically from a financial services perspective.  This training helps maintain staff competence and compliance within our organisation and brings a better understanding to all employees of the markets in which we operate. 

One source of revenue is based on the value of cash balances held in clients' schemes.  These balances are not included in the Consolidated or Company statements of financial position.  In recent years, lower banking margins due to a continued low interest rate environment have resulted in a decline in these revenues.  Following the Bank of England's decision to cut the base rate to a historic low of 0.25% in August 2016 we have reviewed how we might enhance our client banking model and plan to launch a new pooled banking solution for our clients' pension scheme accounts later this year. 

The Group has an indirect exposure to security price risk on investments held by clients, with discretionary portfolio management fees, fund management fees, adviser charges (including legacy investment commissions) and property management fees being based on the value of clients' assets under management, administration or advice.  Periods of volatility in a particular asset class may see changes in how our investment revenues are derived.  However, a great strength of our business is that we can continue to derive income from investments in all asset classes, while ensuring our clients' investment strategies are appropriately aligned to the prevailing market conditions and suitable for their financial needs. 

The table below outlines the current risk factors for the business identified by the Group.  The risk factors mentioned do not purport to be exhaustive as there may be additional risks that materialise over time that the Group has not yet identified or deemed to have a potentially material adverse effect on the business:

Industry risks
Risk type	Risk	Mitigating factors
Changes in investment markets and poor investment performance	Volatility may adversely affect trading and/or the value of the Group's assets under management, administration and advice, from which we derive revenues.	·      Majority of clients' funds held within registered pension schemes or ISAs, where less likely to withdraw funds and lose tax benefits.  ·      Broad range of investment solutions enables clients to shelter from market volatility through diversification, while continuing to generate revenues for the Group.  ·      Market volatility is closely monitored by the Asset Management Executive Committee.
Changing markets and increased competition	The Group operates in a highly competitive environment with evolving characteristics and trends.	·      Consolidating market position develops the Group's pricing power. ·      Control over scalable and flexible bespoke pension administration platform. ·      Experienced management team with a strong track record.  ·      Loyal customer base and strong client retention. ·      Broad service offering gives diversified revenue streams.
Evolving technology	The Group's technology could become obsolete if we are unable to develop our systems to accommodate changing client needs, new products and the emergence of new industry standards.	·      We partner with leading software providers to assist in our systems development. ·      High awareness of the importance of technology at Board level. ·      Expanded systems development with phased implementation of Group-wide platform.
Regulatory risk	The Group may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations.	·      Strong compliance culture.  ·      External professional advisers are engaged to review and advise upon control environment.  ·      Business model and culture embraces FCA principles, including treating clients fairly.  ·      Financial strength provides comfort should capital resource requirements be increased.
Changes in tax law	Changes in tax legislation could reduce the attractiveness of long-term savings via pension schemes, particularly SSASs and SIPPs.	·      The Government has a desire to encourage long-term savings to plan for an ageing population, which is currently under-provided for.  ·      Changes in pension legislation create the need for clients to seek advice.  ·      The development of the Group's investment and asset management services has reduced dependency on pension planning.

Operational risks
Risk type	Risk	Mitigating factors
Damage to the Group's reputation	There is a risk of reputational damage as a result of employee misconduct, failure to manage inside information or conflicts of interest, fraud, improper practice, poor client service or advice.	·      Strong compliance culture with a focus on positive customer outcomes. ·      High level of internal controls, including checks on new staff.  ·      Well-trained staff who ensure the interests of clients are met in the services provided.
Errors, breakdown or security breaches in respect of the Group's software or information technology systems	Serious or prolonged breaches, errors or breakdowns in the Group's software or information technology systems could negatively impact customer confidence.  It could also breach contracts with customers and data protection laws, rendering us liable to disciplinary action by governmental and regulatory authorities, as well as to claims by our clients.	·      Ongoing review of data security.  ·      IT performance, scalability and security are deemed top priorities by the Board. ·      Experienced in-house team of IT professionals and established name suppliers.
Business continuity	In addition to the failure of IT systems, there is a risk of disruption to the business as a result of power failure, fire, flood, acts of terrorism, re-location problems and the like.	·      Periodic review of Business Continuity Plan, considering best practice methodologies. ·      Disaster recovery plan and a disaster recovery team in place.  Business impact analysis has been conducted by department.
Fraud risk	There is a risk an employee or third party defrauds either the Group or a client.	·      The Group ensures the control environment mitigates against the misappropriation of client assets. ·      Strong corporate controls require dual signatures for all payments, SETGO approval for all expenditure greater than £5,000 and Board approval for all expenditure greater than £100,000.  ·      Assessment of fraud risk every six months discussed with the Audit, Risk and Compliance Committee and external auditors.  ·      Clients have view-only access to information.  ·      Ongoing review of risk of fraud due to external attack on the Group's IT systems.
Key personnel risk	The loss of, or inability to recruit, key personnel could have a material adverse effect on the Group's business, results of operations or financial condition.	·      Succession planning is a key consideration throughout the Group. ·      Success of the Group should attract high calibre candidates. ·      Share-based schemes in operation to incentivise staff and encourage retention. ·      Recruitment programmes in place to attract appropriate new staff.  ·      Cross functional acquisition team brought into acquisition projects at an early stage. ·      Keyman cover for company founders.
Litigation or claims made against the Group	Risk of liability related to litigation from clients or third parties and assurance that a claim or claims will not be covered by insurance or, if covered, will exceed the limits of available insurance coverage, or that any insurer will become insolvent and will not meet its obligations to provide the Group with cover.	·      Appropriate levels of Professional Indemnity insurance cover regularly reviewed with the Group's advisers.  ·      Comprehensive internal review procedures, including compliance sign-off, for advice and marketing materials.  ·      Maintenance of three charging models; time cost, fixed and asset based, which are aligned to specific service propositions and agreed with clients.  ·      Restricted status for our consultants to enable the recommendation of our own products and others in the market.
Reliance on third parties	Any regulatory breach or service failure on the part of an outsourced service provider could expose the Group to the risk of regulatory sanctions and reputational damage.	·      Due diligence is part of the selection process for key suppliers. ·      Ongoing review of relationships and concentration of risk with key business partners.
Strategic risk	Risk that management will pursue inappropriate strategies or implement the Group's strategy ineffectively.	·      Experienced management team with successful track record to date. ·      Management has demonstrated a thorough understanding of the market and monitors this through regular meetings with clients.
Corporate manslaughter risk	The risk of breaching corporate manslaughter laws as a result of management breach in duty of care.	·      Policies and procedures in place to provide employee guidance when driving on company business. ·      Company cars regularly maintained and serviced with reputable and vetted companies. ·      Adequate insurance cover. ·      Responsible employees.

Financial risks
Risk type	Risk	Mitigating factors
Counterparty default	That the counterparty to a financial obligation will default on repayments.	·      The Group trades only with recognised, creditworthy third parties.  ·      Customers who wish to trade on credit terms are subject to credit verification procedures.  ·      All receivables are reviewed on an ongoing basis for risk of non-collection and any doubtful balances are provided against.
Bank default	The risk that a bank could fail.	·      We only use banks with strong credit ratings.  ·      Client deposits spread across multiple banks.  ·      Regular review and challenge of treasury policy by management.
Concentration risk	A component of credit risk, arising from a lack of diversity in business activities or geographical risk.	·      The client base is broad, without significant exposure to any individual client or group of clients. ·      Broad service offering gives diversified revenue streams.
Liquidity risk	The risk the Group is unable to meet liabilities as they become due because of an inability to liquidate assets or obtain adequate funding.	·      Cash generative business. ·      Group maintains a surplus above regulatory and working capital requirements. ·      Treasury management provides for the availability of liquid funds at short notice.
Interest rate risk	Risk of decline in earnings due to a decline in banking margin or deposit rates received on surplus cash.  Low interest rates make it harder to structure compelling capital-protected products for clients.	·      Interest rates being at historic lows has resulted in associated income streams no longer being material.  ·      Good relationships with key banking partners.  ·      Access to competitive interest rates due to scale of business.
Underwriting risk	When arranging new products for promotion to the Group's clients, the Group may need to guarantee a minimum aggregate investment to secure appropriate terms for the product.  If actual client investment is less than the underwritten amount, we would incur the cost of either acquiring the unsold element of the product or unwinding any hedges underlying the unsold element of the product.	·      New products created in line with client demand. ·      Potential costs are carefully considered by the Investment Committee prior to the launch of each product.

 

Corporate social responsibility

We believe that running a profitable and growing business, which creates jobs and contributes to the economic success of the areas in which it operates, is a good platform for good corporate social responsibility. 

Mattioli Woods has a long-standing commitment to ensure our staff can engage with their local communities, playing a valuable role by forming innovative partnerships with other organisations and charities.  This social awareness is present throughout the business, from our employees to our clients, our professional connections and the suppliers we use.

We have a high level of engagement within our local communities.  Each year, we sponsor both business, sports and community awards.  Our business has benefited greatly from winning numerous awards and we feel it's right to help other businesses reap the rewards of such accolades.  In addition, we sponsor a variety of local clubs, business and sports related events across the country.  We believe this brings many benefits to the local community and beyond. 

The Group is pleased to continue sponsoring the Rothley 10k, one of the most celebrated charity road running races in Leicestershire, which attracted almost 800 runners in 2017, a new record for the race, which again raised over £20,000 of essential funds for a variety of local causes, including LOROS, Rainbows, County Air Ambulance Service, Age UK, Eye Camps and RNLI. 

In 2015 we chose our first national charity, Breast Cancer Now, the UK's largest breast cancer charity dedicated to funding research into this devastating disease.  By tackling the disease in the labs, on the political agenda, through public health information and with the health service, it believes it can transform the outlook for everyone affected by breast cancer.  To date, the Group has raised over £127,000 for the charity. 

Employees across the country have been involved in a number of activities to raise essential funding for this great cause, including a group wide cycling challenge, Tough Mudder in the Midlands, the National Three Peaks Challenge, the London and Edinburgh marathons, Glack Attack in Aberdeen and numerous cake sales and challenges. 

We also continue to sponsor wheelchair racer Sammi Kinghorn, who won two gold medals at the world para athletics championships in London in 2017 and now has her sights set on the 2018 Commonwealth Games. 

In addition, we support many other smaller charities such as Newmarket's Open Door initiative, which provides vulnerable people with supported housing and training opportunities; Rainbow House in Preston, a comprehensive programme for children, young people and adults with neurological conditions and  Project Luangwa, an international charity supported by our Solihull team that provides education in Zambia through the construction of schools, sponsoring of students and provision of educational materials.

The Group continues to create opportunities for young people through both its Financial Services Development scheme and apprenticeship recruitment, recently winning Apprenticeship Employer of the Year at the 2017 Leicester Apprenticeship Hub Graduation Ceremony.  This year, we are looking to recruit 24 graduates and increase our apprentice intake to 25.  We have also given 21 students the opportunity to work with us to gain valuable work experience during the year. 

Finally, as our Chairman has stated, Bob and I were honoured in the Queen's New Year's Honours List and received MBEs for business and community services in Leicester - an honour greatly appreciated by us both.

Our friend and colleague, Ketan Radia

In September 2016, Mattioli Woods lost one of its very best.  Our friend and colleague, Ketan Radia, passed away shortly after playing football with his beloved two boys and family.  Ketan was a fantastic employee and ambassador for all things Mattioli Woods.  Ketan's friends within the Group continue to help and provide support to his wife Reena and the boys.  Ketan is so sadly missed. 

Approval

In accordance with Section 414(c) of the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013, the Company has prepared a Strategic Report, which includes information that would have been previously included in the Directors' Report. 

The Strategic Report in its entirety has been approved by the Board of Directors and signed on its behalf by:

Ian Mattioli MBE

Chief Executive Officer

4 September 2017

 

Consolidated Statement of Comprehensive Income

For the year ended 31 May 2017

	Note	2017 £000	2016 £000
Revenue	4	50,533	42,950
Employee benefits expense		(28,711)	(24,552)
Other administrative expenses		(9,465)	(7,807)
Share based payments		(1,902)	(1,594)
Amortisation and impairment		(1,996)	(1,816)
Depreciation		(606)	(497)
Loss on disposal of property, plant & equipment		(61)	(56)
Operating profit before financing		7,792	6,628
Finance revenue		45	122
Finance costs		(291)	(459)
Net finance costs		(246)	(337)
Share of profit from associate, net of tax	9	103	-
Profit before tax		7,649	6,291
Income tax expense		(1,293)	(1,046)
Profit for the year		6,356	5,245
Other comprehensive income for the year, net of tax		-	-
Total comprehensive income for the year, net of tax		6,356	5,245
Attributable to:
Equity holders of the parent		6,356	5,245
Earnings per ordinary share:
Basic (pence)	6	24.8	20.9
Adjusted (pence)		34.1	30.6
Diluted (pence)	6	24.7	20.9
Proposed total dividend per share (pence)	7	14.1	12.5

The operating profit for each period arises from the Group's continuing operations.  The parent company has taken advantage of section 408 of the Companies Act 2006 and has not included its own statement of comprehensive income in these financial statements. 

 

Consolidated and Company Statements of Financial Position          Registered number: 3140521

As at 31 May 2017

		2017		2016
		Group	Company	Group	Company
	Note	£000	£000	£000	£000
Assets
Property, plant and equipment		9,671	2,209	1,997	1,924
Intangible assets	8	44,444	36,743	43,410	28,973
Deferred tax asset		798	777	737	731
Investments in subsidiaries		-	18,572	-	15,187
Investment in associate	9	3,476	3,476	-	-
Derivative financial asset	11	110	110	-	-
Total non-current assets		58,499	61,887	46,144	46,815
Trade and other receivables		15,692	22,767	13,495	14,010
Investments		86	86	79	79
Cash and short-term deposits	12	22,979	12,172	29,809	21,381
Total current assets		38,757	35,025	43,383	35,470
Total assets		97,256	96,912	89,527	82,285
Equity
Issued capital	13	258	258	252	252
Share premium	13	30,314	30,314	27,765	27,765
Merger reserve	13	8,781	8,781	8,531	8,531
Equity - share based payments	13	2,571	2,571	1,642	1,642
Capital redemption reserve	13	2,000	2,000	2,000	2,000
Retained earnings	13	28,671	23,892	25,391	22,487
Total equity attributable to equity holders of the parent		72,595	67,816	65,581	62,677
Non-current liabilities
Deferred tax liability		3,600	2,692	3,724	2,127
Financial liabilities and provisions	14	2,842	11,337	5,738	5,738
Total non-current liabilities		6,442	14,029	9,462	7,865
Current liabilities
Trade and other payables		12,862	10,501	10,047	8,397
Income tax payable		957	259	1,083	178
Financial liabilities and provisions	14	4,400	4,307	3,354	3,168
Total current liabilities		18,219	15,067	14,484	11,743
Total liabilities		24,661	29,096	23,946	19,608
Total equities and liabilities		97,256	96,912	89,527	82,285

The profit of the Company for the financial year, after taxation, was £4.5m (2016: £5.1m). 

The financial statements were approved by the Board of directors and authorised for issue on 4 September 2017 and are signed on its behalf by: 

Ian Mattioli MBE                                                        Nathan Imlach

Chief Executive Officer                                                Chief Financial Officer

Consolidated and Company Statements of Changes in Equity

For the year ended 31 May 2017

Group	Issued capital (Note 13) £000	Share premium (Note 13) £000	Merger reserve (Note 13) £000	Equity - share based payments (Note 13) £000	Capital redemption reserve (Note 13) £000	Retained earnings (Note 13) £000	Total equity £000
As at 1 June 2015	204	8,689	4,838	997	2,000	22,739	39,467
Profit for the year	-	-	-	-	-	5,245	5,245
Total comprehensive income	-	-	-	-	-	5,245	5,245
Transactions with owners of the Group, recognised directly in equity
Issue of share capital	48	19,076	3,693	-	-	-	22,817
Share-based payments	-	-	-	596	-	-	596
Deferred tax taken to equity	-	-	-	61	-	-	61
Current tax taken to equity	-	-	-	149	-	-	149
Dividends paid	-	-	-	-	-	(2,754)	(2,754)
Reserves transfer	-	-	-	(161)	-	161	-
As at 31 May 2016	252	27,765	8,531	1,642	2,000	25,391	65,581
Profit for the year	-	-	-	-	-	6,356	6,356
Total comprehensive income	-	-	-	-	-	6,356	6,356
Transactions with owners of the Group, recognised directly in equity
Share of other comprehensive income from associated companies	-	-	-	-	-	5	5
Issue of share capital	6	2,549	250	-	-	-	2,805
Share-based payments	-	-	-	949	-	-	949
Deferred tax taken to equity	-	-	-	52	-	-	52
Current tax taken to equity	-	-	-	237	-	-	237
Dividends paid	-	-	-	-	-	(3,390)	(3,390)
Reserves transfer	-	-	-	(309)	-	309	-
As at 31 May 2017	258	30,314	8,781	2,571	2,000	28,671	72,595

 

Consolidated and Company Statements of Changes in Equity

For the year ended 31 May 2017 (continued)

Company	Issued capital (Note 13) £000	Share premium (Note 13) £000	Merger reserve (Note 13) £000	Equity - share based payments (Note 13) £000	Capital redemption reserve (Note 13) £000	Retained earnings (Note 13) £000	Total equity £000
As at 1 June 2015	204	8,689	4,838	976	2,000	20,048	36,755
Profit for the year	-	-	-	-	-	5,053	5,053
Total comprehensive income	-	-	-	-	-	5,053	5,053
Transactions with owners of the Company, recognised directly in equity
Issue of share capital	48	19,076	3,693	-	-	-	22,817
Share-based payments	-	-	-	596	-	-	596
Deferred tax taken to equity	-	-	-	61	-	-	61
Current tax taken to equity	-	-	-	149	-	-	149
Dividends paid	-	-	-	-	-	(2,754)	(2,754)
Reserves transfer	-	-	-	(140)	-	140	-
As at 31 May 2016	252	27,765	8,531	1,642	2,000	22,487	62,677
Profit for the year	-	-	-	-	-	4,481	4,481
Total comprehensive income	-	-	-	-	-	4,481	4,481
Transactions with owners of the Company, recognised directly in equity
Share of other comprehensive income from associated companies	-	-	-	-	-	5	5
Issue of share capital	6	2,549	250	-	-	-	2,805
Share-based payments	-	-	-	949	-	-	949
Deferred tax taken to equity	-	-	-	52	-	-	52
Current tax taken to equity	-	-	-	237	-	-	237
Dividends paid	-	-	-	-	-	(3,390)	(3,390)
Reserves transfer	-	-	-	(309)	-	309	-
As at 31 May 2017	258	30,314	8,781	2,571	2,000	23,892	67,816

Consolidated and Company Statements of Cash Flows

For the year ended 31 May 2017

		Group 2017	Company 2017	Group 2016	Company 2016
	Note	£000	£000	£000	£000
Operating activities
Profit for the year Adjustments for:		6,356	4,481	5,245	5,053
Depreciation		606	596	497	482
Amortisation and impairment	8	1,996	1,655	1,816	1,411
Gain on bargain purchase		-	-	(105)	(105)
Investment income		(45)	(150)	(122)	(93)
Interest expense		291	494	459	785
Share of profit from associate	9	(103)	(103)	-	-
Gain on revaluation of derivative financial asset	9	(93)	(93)	-	-
Loss on disposal of property, plant and equipment		61	61	56	56
Equity-settled share-based payments		1,241	1,241	838	838
Cash-settled share-based payments		661	661	756	756
Dividend income		-	(800)	-	(2,497)
Income tax expense		1,293	706	1,046	625
Cash flows from operating activities before changes in working capital and provisions		12,264	8,749	10,486	7,311
Increase in trade and other receivables		(2,018)	(9,140)	(509)	(2,058)
Increase in trade and other payables		1,762	1,944	1,619	1,035
(Decrease)/increase in provisions		(1,544)	(1,536)	192	192
Cash generated from operations		10,464	17	11,788	6,480
Interest paid		(2)	(2)	-	-
Income taxes paid		(1,700)	(875)	(1,714)	(1,343)
Net cash flows from operating activities		8,762	(860)	10,074	5,137
Investing activities
Proceeds from sale of property, plant and equipment		126	126	75	75
Purchase of property, plant and equipment		(8,225)	(1,004)	(1,115)	(1,107)
Purchase of software	8	(616)	(612)	(597)	(590)
Consideration paid on acquisition of subsidiaries	3	(3,490)	(3,490)	(6,911)	(6,911)
Investment in subsidiary		-	(1,000)	-	-
Consideration paid for shares in associate	9	(1,646)	(1,646)
Consideration paid on acquisition of business	3	-	-	(735)	(735)
Cash transferred on hive up of group companies		-	1,289	-	-
Cash received on acquisition of subsidiaries	3	172	-	3,217	-
Other investments		-	-	(16)	(16)
Loans advanced to property syndicates		(541)	(541)	(2,188)	(2,188)
Loan repayments from property syndicates		571	571	2,158	2,158
Interest received		39	24	122	93
Dividends received		-	800	-	800
Net cash flows from investing activities		(13,610)	(5,483)	(5,990)	(8,421)
Financing activities
Proceeds from the issue of share capital		524	524	19,568	19,568
Payment of costs of share issue		-	-	(693)	(693)
Repayment of borrowings acquired in business combinations		884	-	(965)	-
Repayment of Directors' loans		-	-	(1)	(1)
Dividends paid	7	(3,390)	(3,390)	(2,754)	(2,754)
Net cash flows from financing activities		(1,982)	(2,866)	15,155	16,120
Net (decrease)/increase in cash and cash equivalents		(6,830)	(9,209)	19,239	12,836
Cash and cash equivalents at start year	12	29,809	21,381	10,570	8,545
Cash and cash equivalents at end of year	12	22,979	12,172	29,809	21,381

 

Notes to the financial statements

1       Corporate information

Mattioli Woods plc ("the Company") is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM market of the London Stock Exchange plc.  The nature of the Group's operations and its principal activities are set out in the Chief Executive's Review. 

2       Basis of preparation and accounting policies

2.1    Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and in accordance with the requirements of the Companies Act applicable to companies reporting under IFRS. 

The financial statements comprise the financial statements of Mattioli Woods plc and its subsidiaries ("the Group") as at 31 May each year.  The financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value and are presented in pounds, with all values rounded to the nearest thousand pounds (£000) except when otherwise indicated. 

The principal accounting policies adopted are set out in this note and, unless otherwise stated, have been applied consistently to all periods presented in the financial statements.  The financial statements were authorised for issue in accordance with a resolution of the directors on 4 September 2017. 

2.2    Developments in reporting standards and interpretations

Standards affecting the financial statements

There have been no new or revised standards and interpretations that have been adopted in the current year and have affected the amounts reported in these financial statements. 

Standards not affecting the financial statements

The following new and revised standards and interpretations have been adopted in the current year:

 

Standard or interpretation		Periods commencing on or after
Annual Improvements to IFRSs 2012-2014 Cycle		1 January 2016
IAS 1	Presentation of financial statements	1 January 2016
IAS 16 (amended)	Property, Plant and Equipment	1 January 2016
IAS 27 (revised)	Separate Financial Statements	1 January 2016
IAS 28 (amended)	Investments in Associates and Joint Ventures	1 January 2016
IAS 38 (amended)	Intangible Assets	1 January 2016
IFRS 10 (amended)	Consolidated Financial Statements - Applying the       Consolidation Exception	1 January 2016
IFRS 11 (amended)	Joint Arrangements	1 January 2016
IFRS 12 (amended)	Disclosures of Interests in Other Entities	1 January 2016

Their adoption has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements, or give rise to additional disclosures. 

Future new standards and interpretations

A number of new standards and amendments to standards and interpretations will be effective for future annual periods commencing after 1 June 2016 and, therefore, have not been applied in preparing these consolidated financial statements.  At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective:

Standard or interpretation		Periods commencing on or after
Annual Improvements to IFRSs 2014-2016 Cycle		1 January 2017/2018
IAS 7	Disclosure Initiative	1 January 2017
IAS 12	Recognition of Deferred Tax Assets for Unrealised                    Losses	1 January 2017
IFRS 2 (amended)	Share Based Payments - Classification and      measurement	1 January 2018
IFRS 9	Financial Instruments	1 January 2018
IFRS 15	Revenue from Contracts with Customers	1 January 2018
IFRS 16	Leases	1 January 2019

IFRS 9 'Financial Instruments', IFRS 15 'Revenue from Contracts with Customers' and IFRS 16 'Leases' are expected to have the most significant effect on the consolidated financial statements of the Group. 

IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' are to become mandatory for periods commencing on or after 1 January 2018.  These standards have been adopted by the EU and the Group does not plan to adopt these standards early.  IFRS 9 'Financial Instruments' could change the classification and measurement of financial assets and the timing and extent of credit provisioning.  IFRS 15 'Revenue from Contracts with Customers' could change how and when revenue is recognised from contracts with customers.  The extent of their impact has not yet been fully determined. 

IFRS 16 'Leases' is not expected to become mandatory for periods commencing before 1 January 2019.  It eliminates the classification of leases as either operating leases or finance leases.  The Group will be required to recognise all leases with a term of more than 12 months as a lease asset in its statement of financial position, together with a financial liability representing its obligation to make future lease payments.  The extent of its impact has not yet been fully determined. 

Other than to expand certain disclosures within the financial statements, the directors do not expect the adoption of the other standards and interpretations listed above will have a material impact on the financial statements of the Group in the future periods.  

2.3       Principal accounting policies

Basis of consolidation

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.  The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.  All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full. 

Business combinations

Business combinations are accounted for using the purchase accounting method.  This involves assessing whether any assets acquired meet the criteria for recognition as separately identifiable intangible assets.  Intangible assets are measured on initial recognition at their fair value at the date of acquisition.  Client portfolios are valued by discounting their expected future cash flows over their expected useful lives, based on the Group's historic experience.  Expected future cash flows are estimated based on the historic revenues and costs associated with the operation of that client portfolio.  The discount rates used estimate the cost of capital, adjusted for risk. 

Associates

The Company's share of profits from associates is reported separately in the Statement of Comprehensive income and the investment is recognised in the Statement of Financial Position using the equity method.  The investment is initially recorded at cost and subsequently adjusted to reflect the Company's share of the cumulative profits of the associate since acquisition.  Appropriate adjustments to the Company's share of the profits or losses after acquisition are made to account for additional amortisation of the associate's amortisable assets based on the excess of their fair values over their carrying amounts at the time the investment was acquired. 

Group re-organisation

On 31 August 2016 the trade and assets of the Taylor Patterson Group Limited and its subsidiaries Taylor Patterson Financial Planning Limited and Taylor Patterson Associates Limited (together "the Business") were transferred to the Company.  The trade and assets were exchanged for loan notes equal to the book value of the assets and assumed liabilities of the Business as at 31 August 2016, attracting annual interest on the outstanding principal at a rate of 3% above the Bank of England base rate.

2.4       Key sources of judgements and estimation uncertainty

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities.  If in the future such estimates and assumptions, which are based on management's best judgement at the date of preparation of the financial statements, deviate from actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change.  The areas where a higher degree of judgement or complexity arises, or where assumptions and estimates are significant to the consolidated financial statements, are discussed below. 

Impairment of client portfolios

The Group reviews whether acquired client portfolios are impaired at least on an annual basis.  This comprises an estimation of the fair value less cost to sell and the value in use of the acquired client portfolios.  In assessing value in use, the estimated future cash flows expected to arise from each client portfolio are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset.  

The key assumptions used in respect of value in use calculations are those regarding growth rates and anticipated changes to revenues and costs during the period covered by the calculations.  Changes to revenue and costs are based upon management's expectation.  The Group prepares its annual budget and five-year cash flow forecasts derived therefrom, thereafter extrapolating these cash flows using a terminal growth rate of 2.5% (2016: 2.5%), which management considers conservative against industry average long-term growth rates. 

The key assumption used in arriving at a fair value less costs to sell requires a valuation based on earnings multiples and values based on assets under management.  These have been determined by looking at valuations of similar businesses and the consideration paid in comparable transactions.  Management has used a range of multiples resulting in an average of 7.5x EBITDA to arrive at a fair value. 

The carrying amount of client portfolios at 31 May 2017 was £25.2m (2016: £25.4m).  No impairment provisions have been made during the year (2016: £nil) based upon the directors' review. 

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis.  This requires an estimation of the value in use of the cash-generating units to which the goodwill has been allocated.  In assessing value in use, the estimated future cash flows expected to arise from the cash-generating unit are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset. 

The key assumptions used in respect of value in use calculations are those regarding growth rates and anticipated changes to revenues and costs during the period covered by the calculations, based upon management's expectation.  The carrying amount of goodwill at 31 May 2017 was £17.3m (2016: £16.4m).  No impairment provisions have been made during the year (2016: £nil) based upon the directors' review. 

Internally generated capitalised software

The costs of internal software developments are capitalised where they are judged to have an economic value that will extend into the future and meet the recognition criteria in IAS38.  Internally generated software is then amortised over an estimated useful life, assessed by taking into consideration the useful life of comparable software packages.  The carrying amount of internally generated capitalised software at 31 May 2017 was £1.1m (2016: £1.1m). 

Deferred tax assets

Deferred tax assets include temporary differences related to employee benefits settled via the issue of share options.  Recognition of the deferred tax assets assumes share options will have a positive value at the date of vesting, which is greater than the exercise price.  The carrying amount of deferred tax assets at 31 May 2017 was £0.8m (2016: £0.7m). 

Interests in associates

Associates are entities in which the Group owns less than 100% of voting rights and has significant influence, but not control or joint control over the financial and operating policies.  In determining whether control exists, this requires significant judgements in assessing factors such as the structure of the investment and the contractual agreement.  The existence of significant influence is evidenced by the Group having representation on the board and the ability to participate in decisions but not being able to control the vote.  The carrying amount of the investment in associate at 31 May 2017 was £3.5m (2016: £nil).

Recoverability of accrued time costs and disbursements

The Group recognises accrued income in respect of time costs and disbursements incurred on clients' affairs during the accounting period, which have not been invoiced at the reporting date.  This requires an estimation of the recoverability of the time costs and disbursements incurred but not invoiced to clients.  The carrying amount of accrued time costs and disbursements at 31 May 2017 was £4.5m (2016: £4.6m). 

Accrued income

Accrued income is recognised in respect of fees, adviser charges and commissions due to the Group on investments and bank deposits placed during the accounting period which have not been received at the reporting date.  This requires an estimation of the amount of income that will be received subsequent to the reporting date in respect of the accounting period, which is based on the value of historic receipts and investments placed by clients under management and advice.  The carrying amount of accrued income at 31 May 2017 was £3.2m (2016: £2.5m). 

Acquisitions and business combinations

When an acquisition arises the Group is required under IFRS to calculate the Purchase Price Allocation ("PPA").  The PPA requires companies to report the fair value of assets and liabilities acquired and it establishes useful lives for identified assets.  The identification and the valuation of the assets and liabilities acquired involves estimation and judgement when determining whether the recognition criteria are met.  The classification of consideration payable as either purchase consideration or remuneration is an area of judgement and estimate. 

Subjectivity is also involved in PPA with the estimation of the future value of brands, technology, customer relationships and goodwill. 

Contingent consideration payable on acquisitions

The Group has entered into certain acquisition agreements that provide for a contingent consideration to be paid.  A financial instrument is recognised for all amounts management anticipates will be paid under the relevant acquisition agreement.  This requires management to make an estimate of the expected future cash flows from the acquired business and determine a suitable discount rate for the calculation of the present value of any deferred contingent consideration payments.  The carrying amount of contingent consideration provided for at 31 May 2017 was £4.4m (2016: £5.8m). 

 

Provisions

As detailed in Note 14, the Group recognises provisions for client claims, contingent consideration payable on acquisitions, commission clawbacks, cash-settled share based payment awards and other obligations which exist at the reporting date.  These provisions are estimates and the actual amount and timing of future cash flows are dependent on future events.  Management reviews these provisions at each reporting date to ensure they are measured at the current best estimate of the expenditure required to settle the obligation.  Any difference between the amounts previously recognised and the current estimate is recognised immediately in the statement of comprehensive income. 

3. Business combinations

The Group completed one acquisition during the year.  Transaction costs of £0.1m incurred during the course of the acquisition have been expensed and are included in administrative expenses in the consolidated statement of comprehensive income and operating cash flows in the consolidated statement of cash flows in the period in which they were incurred. 

Acquisition of MC Trustees Limited

On 7 September 2016, Mattioli Woods plc acquired the entire issued share capital of Old Station Road Holdings Limited and its subsidiaries (together "MC Trustees"), a pension administration business based in Hampton-in-Arden in the West Midlands. 

The acquisition has been accounted for using the acquisition method.  The fair value of the identifiable assets and liabilities of MC Trustees as at the date of acquisition was:

 

	Fair value recognised on acquisition £000	Fair value adjustments £000	Previous carrying value £000
Property, plant and equipment	18	-	18
Client portfolio	1,522	1,522	-
Cash at bank	172	-	172
Trade receivables	208	(68)	276
Other receivables	884	-	884
Assets	2,804	1,454	1,350
Trade and other payables	(112)	-	(112)
Accruals and deferred income	(625)	(10)	(615)
Other taxation and social security	(72)	-	(72)
Income tax	(108)	-	(108)
Provisions	(93)	(80)	(13)
Deferred tax liability	(278)	(274)	(4)
Liabilities	(1,288)	(364)	(924)
Total identifiable net assets at fair value	1,516
Goodwill	869
Total acquisition cost	2,385
Analysed as follows:
Initial cash consideration	1,241
Adjustment to initial consideration	(14)
New shares in Mattioli Woods	250
Contingent consideration	1,000
Discounting of contingent consideration	(92)
Total acquisition cost	2,385
Cash outflow on acquisition
Cash paid	1,241
Cash acquired	(172)
Acquired net assets adjustment	(14)
Acquisition costs	130
Net cash outflow	1,185

MC Trustees specialises in the provision of personal service and strong technical advice.  It is an excellent cultural and strategic fit with Mattioli Woods' existing pension business, providing pension administration and trustee services to over 1,500 SIPP and SSAS clients with over £400m of assets under administration.  The acquisition brings additional scale to Mattioli Woods' existing operations and offers the opportunity to transfer MC Trustees' business onto Mattioli Woods' bespoke pension administration platform. 

 

Synergies include the ability to promote additional services to existing and prospective clients of MC Trustees.  In addition, the acquisition added further specialist expertise to the Group and its experienced management team has remained with the business.  The goodwill recognised above is attributed to the expected benefits from combining the assets and activities of MC Trustees with those of the Group.  The primary components of this residual goodwill comprise:

·     Revenue synergies expected to be available to Mattioli Woods as a result of the transaction;

·     The workforce;

·     The knowledge and know-how resident in MC Trustees' modus operandi; and

·     New opportunities available to the combined business, as a result of both MC Trustees and the existing business becoming part of a more sizeable listed company. 

None of the recognised goodwill is expected to be deductible for income tax purposes.  The client portfolio is being amortised on a straight-line basis over an estimated useful life based on the Group's historic experience. 

From the date of acquisition MC Trustees has contributed £1.22m to revenue and £0.21m to the Group profit for the year.  If the combination had taken place at the beginning of the year, Group revenue from continuing operations would have been £51.0m and the profit for the year would have been £6.3m. 

Contingent consideration

The Group has entered into certain acquisition agreements that provide for contingent consideration to be paid.  These agreements and the basis of calculation of the net present value of the contingent consideration are summarised below.  While it is not possible to determine the exact amount of contingent consideration (as this will depend on the performance of the acquired businesses during the period), the Group estimates the fair value of contingent consideration payable within the next 12 months is £2.8m (2016: £2.3m). 

On 7 September 2016 the Group acquired MC Trustees for total consideration of up to £2.5m, comprising initial consideration of £1.23m in cash plus 38,081 new ordinary shares of 1p each in Mattioli Woods plus contingent consideration of up to £1.0m payable in cash in the two years following completion if certain financial target based on growth in earnings before interest, tax, depreciation and amortisation are met.  The Group estimates the fair value of the remaining contingent consideration at 31 May 2017 to be £0.9m using cash flows approved by the Board covering the contingent consideration period and expects the maximum contingent consideration will be payable. 

On 8 September 2015 the Group acquired Taylor Patterson for an initial consideration comprising cash of £2.1m (excluding cash acquired with the business) and 419,888 shares in Mattioli Woods, plus contingent consideration of £3.3m payable in cash in the three years following completion if certain revenue and profit targets are met.  The Group estimates the fair value of the remaining contingent consideration at 31 May 2017 to be £2.2m (2016: £3.1m) using cash flows approved by the Board covering the contingent consideration period and expects the maximum contingent consideration will be payable. 

On 23 June 2015 the Group acquired Boyd Coughlan for initial consideration comprising cash of £3.9m (excluding cash acquired with the business) and 235,742 shares in Mattioli Woods, plus contingent consideration of £2.5m payable in cash in the two years following completion if certain profit targets are met.  The Group estimates the fair value of the remaining contingent consideration at 31 May 2017 to be £1.2m (2016: £2.4m) using cash flows approved by the Board covering the contingent consideration period and expects the maximum contingent consideration will be payable. 

On 11 August 2014 the Group acquired UKWM Pensions for initial cash consideration of £0.28m (excluding cash acquired with the business) plus contingent consideration of £0.08m payable in cash in the two years following completion if certain revenue targets are met.  The Group estimates the net present value of the remaining contingent consideration at 31 May 2017 to be £0.04m (2016: £0.04m) using cash flows approved by the Board covering the contingent consideration period and expects the remaining contingent consideration will be payable. 

On 23 April 2013, the Group acquired the trade and certain assets of Ashcourt Rowan Administration Limited, 100% of the share capital of Ashcourt Rowan Pension Trustees Limited and 100% of the share capital of Robinson Gear (Management Services) Limited for an initial cash consideration of £0.66m plus contingent consideration of up to £0.625m payable in cash in the five years following completion if certain targets are met based on growth in revenues and client retention during that period.  During the year £0.25m of the remaining consideration payable was released to the Statement of Comprehensive Income as the number of new scheme referrals were lower than target.  The Group estimates that at 31 May 2017 no further consideration will be payable so the remaining consideration is £nil (2016: £0.25m) using cash flows approved by the Board covering the contingent consideration period.

4. Revenue

Revenue disclosed in the consolidated statement of comprehensive income is analysed as follows:

	2017 £000	2016 £000
Rendering of services	49,070	40,282
Commission income	1,463	2,668
	50,533	42,950

 

5. Segment information

The Group's objective is to fully integrate the businesses it acquires, to enable it to deliver holistic solutions across its wide and diverse client base.  During the year, the Group transferred the trade and assets of the Taylor Patterson Group Limited and its subsidiaries into Mattioli Woods.  The Group's operating segments comprise the following:

·     Pension consultancy and administration - fees earned by Mattioli Woods for setting up and administering pension schemes.  Additional fees are generated from consultancy services provided for special one-off activities and the provision of bespoke scheme banking arrangements.  In prior years, fees earned for setting up and administering pension schemes under an advice‑led model were reported separately for setting up and administering pension schemes under an administration‑only model.  Following the transfer of the trade and assets of City Pensions Limited to Mattioli Woods, these fees are reported as one operating segment;

·     Investment and asset management - income generated from the management and placing of investments on behalf of clients;

·     Property management - income generated where Custodian Capital manages collective property investment vehicles, facilitates direct commercial property investments on behalf of clients or acts as the external discretionary manager for Custodian REIT plc; and

·     Employee benefits - income generated by the Group's employee benefits operations.  

Each segment represents a revenue stream subject to risks and returns that are different to other operating segments, although each operating segment's products and services are offered to broadly the same market.  The Group operates exclusively within the United Kingdom.

Operating segments

The operating segments defined above all utilise the same intangible assets, property, plant and equipment and the segments have been financed as a whole, rather than individually.  The Group's operating segments are managed together as one business.  Accordingly, certain costs are not allocated across the individual operating segments, as they are managed on a group basis.  Segment profit or loss reflects the measure of segment performance reviewed by the Board of Directors (the Chief Operating Decision Maker). 

The following tables present revenue and profit information regarding the Group's operating segments for the two years ended 31 May 2017 and 2016 respectively. 

Year ended 31 May 2017	Pension consultancy and administration £000	Investment and asset management £000	Property management £000	Employee benefits £000	Total segments £000	Corporate costs £000	Consolidated £000
Revenue External client	18,869	21,079	5,178	5,407	50,533	-	50,533
Total revenue	18,869	21,079	5,178	5,407	50,533	-	50,533
Results Segment result	3,569	5,008	1,198	458	10,233	(2,584)	7,649

 

Year ended 31 May 2016	Pension consultancy and administration £000	Investment and  asset management £000	Property management £000	Employee benefits £000	Total segments £000	Corporate costs £000	Consolidated £000
Revenue External client	16,563	17,054	4,066	5,267	42,950	-	42,950
Total revenue	16,563	17,054	4,066	5,267	42,950	-	42,950
Results Segment result	3,279	3,498	814	491	8,082	(1,791)	6,291

Segment assets

The following table presents segment assets of the Group's operating segments:

		31 May 2017	31 May 2016
		£000	£000
Pension consultancy and administration		23,831	21,977
Investment and asset management		22,870	19,683
Property management		1,360	898
Employee benefits		11,649	11,311
Total segments		59,710	53,869
Corporate assets		37,546	35,658
Total assets		97,256	89,527

Segment assets exclude property, plant and equipment, certain items of computer software, investments, current and deferred tax balances, and cash balances, as these assets are considered corporate in nature and are not allocated to a specific operating segment.  Acquired intangibles and amortisation thereon relate to a specific transaction and are allocated between individual operating segments based on the headcount or revenue mix of the cash generating units at the time of acquisition.  The subsequent delivery of services to acquired clients may be across a number or all operating segments, comprising different operating segments to those the acquired intangibles have been allocated to. 

Liabilities have not been allocated between individual operating segments, as they cannot be allocated on anything other than an arbitrary basis. 

Corporate costs

Certain administrative expenses including acquisition costs, amortisation of software, depreciation of property, plant and equipment, irrecoverable VAT, legal and professional fees and professional indemnity insurance are not allocated between segments that are managed on a unified basis and utilise the same intangible and tangible assets. 

Finance income and expenses, gains and losses on the disposal of assets, taxes, intangible assets and certain other assets and liabilities are not allocated to individual segments as they are managed on a group basis.  Capital expenditure consists of additions of property, plant and equipment and intangible assets, including assets from the acquisition of subsidiaries.  

 

		31 May 2017	31 May 2016
Reconciliation of profit		£000	£000
Total segments		10,233	8,082
Acquisition costs		(378)	(339)
Depreciation		(606)	(497)
Amortisation and impairment		(259)	(247)
Loss on disposal of assets		(61)	(56)
Unallocated overheads		(1,030)	(298)
Gain on revaluation of derivative financial asset		93	-
Bank charges		(22)	(17)
Finance income		45	122
Finance costs		(291)	(459)
Dilapidations		(75)	-
Group profit before tax		7,649	6,291

		31 May 2017	31 May 2016
Reconciliation of assets		£000	£000
Segment operating assets		59,710	53,869
Property, plant and equipment		9,671	1,997
Intangible assets		1,964	1,608
Investments		86	79
Deferred tax asset		798	737
Prepayments and other receivables		1,938	1,428
Derivative financial asset		110	-
Cash and short-term deposits		22,979	29,809
Total assets		97,256	89,527

Country-by-country reporting

HM Treasury has transposed the requirements set out under the Capital Requirements Directive IV ("CRD IV") and issued the Capital Requirements Country-by-Country Reporting Regulations 2013, effective 1 January 2014.  The legislation requires Mattioli Woods plc (together with its subsidiaries) to publish certain additional information split by country, on a consolidated basis, for the year ended 31 May 2017.

Mattioli Woods plc and its subsidiaries are all incorporated in and operate from the United Kingdom.  All employees of the Group hold contracts of employment in the United Kingdom.  All turnover (revenue) and profit before tax is recognised on activities based in the United Kingdom.  All tax paid and any subsidies received are paid to and received from UK institutions. 

6. Earnings per ordinary share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year.  

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. 

The income and share data used in the basic and diluted earnings per share computations is as follows:

	2017 £000	2016 £000
Net profit and diluted net profit attributable to equity holders of the Company	6,356	5,245
Weighted average number of ordinary shares:	000s	000s
Issued ordinary shares at start period	25,205	20,372
Effect of shares issued during the year ended 31 May 2016	-	4,430
Effect of shares issued during the year ended 31 May 2017	455	258
Basic weighted average number of shares	25,660	25,060
Effect of dilutive options at the statement of financial position date	101	90
Diluted weighted average number of shares	25,761	25,150

The Company has granted options under the Share Option Plan, the Consultants' Share Option Plan and the LTIP to certain of its senior managers and directors to acquire (in aggregate) up to 3.33% of its issued share capital (see Note 10).  Under IAS 33 Earnings Per Share, contingently issuable ordinary shares are treated as outstanding and included in the calculation of diluted earnings per share if the conditions (the events triggering the vesting of the option) are satisfied.  At 31 May 2017 the conditions attached to 777,480 options granted under the LTIP were not satisfied (2016: 696,574).  If the conditions had been satisfied, diluted earnings per share would have been 24.0p per share (2016: 20.3p). 

Since the reporting date and the date of completion of these financial statements the following transactions have taken place involving ordinary shares or potential ordinary shares:

·     The issue of 38,011 ordinary shares to satisfy the exercise of options under the Consultants' Share Option Plan;

·     The issue of 19,352 ordinary shares under the Mattioli Woods plc Share Incentive Plan; and

·     The issue of 9,819 ordinary shares to satisfy the exercise of options under the LTIP. 

 

7. Dividends paid and proposed

	2017 £000	2016 £000
Declared and paid during the year:
Equity dividends on ordinary shares:
- Final dividend for 2016: 8.65p (2015: 7.16p)	2,187	1,790
- Interim dividend for 2017: 4.7p (2016: 3.85p)	1,203	964
Dividends paid	3,390	2,754
Proposed for approval by shareholders at the AGM:
Final dividend for 2017: 9.4p (2016: 8.65p)	2,432	2,187

8. Intangible assets

Group	Internally generated software £000	Software £000	Client portfolios £000	Goodwill £000	Other £000	Total £000
Gross carrying amount:
At 1 June 2015	1,051	866	21,712	10,771	35	34,435
Arising on acquisitions	-	-	10,120	5,590	-	15,710
Additions	383	214	-	-	-	597
At 31 May 2016	1,434	1,080	31,832	16,361	35	50,742
Arising on acquisitions	-	-	1,522	869	-	2,391
Additions	155	461	-	23	-	639
At 31 May 2017	1,589	1,541	33,354	17,253	35	53,772
Amortisation and impairment:
At 1 June 2015	243	483	4,822	-	35	5,583
Amortisation during the year	106	74	1,569	-	-	1,749
At 31 May 2016	349	557	6,391	-	35	7,332
Amortisation during the year	145	114	1,737	-	-	1,996
At 31 May 2017	494	671	8,128	-	35	9,328
Carrying amount:
At 31 May 2017	1,095	870	25,226	17,253	-	44,444
At 31 May 2016	1,085	523	25,441	16,361	-	43,410
At 31 May 2015	808	383	16,890	10,771	-	28,852

 

Company	Internally generated software £000	Software £000	Client portfolios £000	Goodwill £000	Total £000
Gross carrying amount:
At 1 June 2015	1,051	766	19,658	10,771	32,246
Transfer from group companies	-	-	909	-	909
Additions	383	207	-	-	590
At 31 May 2016	1,434	973	20,567	10,771	33,745
Transfer from Group companies	-	-	4,693	4,120	8,813
Additions	155	457	-	-	612
At 31 May 2017	1,589	1,430	25,260	14,891	43,170
Amortisation and impairment:
At 1 June 2015	243	417	2,768	-	3,428
Amortisation during the year	106	68	1,170	-	1,344
At 31 May 2016	349	485	3,938	-	4,772
Amortisation during the year	145	106	1,404	-	1,655
At 31 May 2017	494	591	5,342	-	6,427
Carrying amount:
At 31 May 2017	1,095	839	19,918	14,891	36,743
At 31 May 2016	1,085	488	16,629	10,771	28,973
At 31 May 2015	808	349	16,890	10,771	28,818

Software

Software is amortised over its useful economic life of four years on a reducing balance basis.  Internally generated software represents the development costs of the Group's bespoke customer relationship management, administration and trading platform.  The directors believe this technology will be the principal technology platform used throughout the Group for the foreseeable future.  Internally generated software is amortised on a straight-line basis over an estimated useful life of 10 years. 

Client portfolios

Client portfolios represent individual client portfolios acquired through business combinations.  Client portfolios are amortised on a straight-line basis over an estimated useful life of between 10 and 25 years, based on the Group's historic experience. 

 

Goodwill

Goodwill arises where the price paid for an acquisition is greater than the fair value of the net assets acquired.  Goodwill arising on business combinations is subject to annual impairment testing.

Other intangibles

Other intangibles represent external costs incurred in obtaining a licence.  Other intangibles are amortised on a straight-line basis over a useful economic life of three years. 

9. Investment in associate and related derivative

Investment in associate

On 6 February 2017 the Group acquired 49% of the ordinary share capital of Amati Global Investors Limited ("Amati") from Amati Global Partners LLP plus an option over the remaining ordinary share capital of Amati for a total consideration of £3.39m, comprising £1.65m in cash and £1.74m of new ordinary shares in Mattioli Woods. 

Amati is a fund management firm founded in 2010 by Paul Jourdan and Douglas Lawson following the management buyout of Noble Fund Managers Limited.  It focuses on small and mid-sized companies, with a universe ranging from fully listed constituents of the FTSE Mid 250 and FTSE Small Cap indices, to stocks quoted on AIM.  At the date of acquisition it managed £120m of funds, including the TB Amati UK Smaller Companies Fund; two AIM Venture Capital Trusts - Amati VCT and Amati VCT 2; and an AIM IHT portfolio service.  Amati's principal place of business is the United Kingdom. 

The Group exercises significant influence by virtue of its contractual right to appoint a minority of directors to Amati's board of directors.  The option held by the Group to acquire the remaining shares in Amati is not exercisable until 6 February 2019.  In addition, the Group has no other rights which would allow it to exercise control over Amati's operations.  Therefore, the Group is not judged to control Amati and it is not consolidated. 

The movement in the Group's investment in associate is as follows:

 

Investment in associate - Group and Company	2017 £000	2016 £000
At 1 June	-	-
Investment in Amati Global Investors Limited	3,368	-
Share of profit for the period	120	-
Share of other comprehensive income	5
Amortisation of fair value intangibles	(17)	-
At 31 May	3,476	-

Other comprehensive income represents a movement in Amati's revaluation reserve recognised directly in equity. 

The results of Amati from the date of acquisition and its aggregated assets and liabilities as at 31 May 2017 are as follows:

Name	Country of incorporation	Assets £000	Liabilities £000	Revenue £000	Profit £000	Interest held
Amati Global Investors Limited	Scotland	1,832	468	781	245	49%
Group's share of profit					120

The net assets of Amati as at the date of investment were £1,108,749.  At 31 May 2017 the net assets of Amati had increased by £255,632 to £1,364,382, increasing the Group's interest in the associate by £125,260 during the period. 

Derivative financial instruments

As part of the transaction to acquire its holding in Amati, Mattioli Woods also entered into an option agreement with the Seller which entitles Mattioli Woods to acquire the remaining 51% of Amati in the two years commencing 6 February 2019 for a mixture of cash and Mattioli Woods' ordinary shares ("the Option").  If Mattioli Woods does not exercise the Option to acquire the remaining stake from the Seller, the Seller has an option to buy Mattioli Woods' shareholding back for the original consideration paid. 

The fair value of the option contract at the date of acquisition was £16,859.  At 31 May 2017, the fair value of the option contract was £109,974 (2016: £nil) (Note 11).  The fair value of the option contract is calculated using an option valuation model. 

 

10. Share based payments

Consultants' Share Option Plan

The Company also operates the Consultants' Share Option Plan by which certain senior executives are able to subscribe for ordinary shares in the Company.  Options granted under the Consultants' Share Option Plan are summarised as follows:

Date of grant	Exercise price £	At 1 June 2016 No.	Exercised during the year No.	At 31 May 2017 No.
4 September 2007	2.79	68,113	(30,102)	38,011
8 September 2009	2.16	75,812	(13,470)	62,342
		143,925	(43,572)	100,353

The exercise price of the options is equal to the market price of the shares at the close of business on the day immediately preceding the date of grant.  The options vest when the option holders achieve certain individual performance hurdles.  No options vested during the year as a result of the associated performance conditions being fulfilled.  If the performance hurdles, which are linked to individual sales revenues, are not met over the five financial years commencing on 1 June before the date of grant, the options lapse. 

Long‑Term Incentive Plan

During the year, Mattioli Woods granted awards to the Company's executive directors and certain senior employees under the LTIP.  Conditional share awards ("Equity-settled") grant participating employees a conditional right to become entitled to options with an exercise price of 1 pence over ordinary shares in the Company.  Conditional cash awards ("Cash-settled") grant participating employees a conditional right to be paid a cash amount based on the proceeds of the sale of a specified number of Ordinary Shares following the vesting of the award.  Movements in the LTIP scheme during the period were as follows:

 

LTIP options			31 May 2017 Equity-settled No.	31 May 2017 Cash-settled No.	31 May 2016 Equity-settled No.	31 May 2016 Cash-settled No.
Outstanding as at 1 June			696,574	266,650	410,032	266,650
Granted during the year			294,340	-	292,574	-
Exercised during the year			(183,269)	(148,149)	-	-
Forfeited during the year			(200)	-	(6,032)	-
Outstanding at 31 May			807,445	118,501	696,574	266,650
Exercisable at 31 May			29,965	-	-	-

The LTIP awards are subject to the achievement of corporate profitability targets measured over a three year performance period and will vest following publication of the Group's audited results for the final performance year.  The amounts shown above represent the maximum opportunity for the participants in the LTIP.  

Share Incentive Plan

The Company introduced the Mattioli Woods plc Share Incentive Plan ("the SIP") in July 2008.  Participants in the SIP are entitled to purchase, at market value, up to a prescribed number of new 1p ordinary shares in the Company at the end of each month for which they will receive a like for like matching share.  These ordinary shares rank pari passu with existing issued ordinary shares of the Company.

A total of 94,392 (2016: 99,972) new ordinary shares were issued to the 308 (2016: 218) employees who participated in the SIP during the year.  At 31 May 2017 the SIP held 553,658 (2016: 508,218) shares on their behalf. 

Share based payments expense

The expense for share based payments made in respect of employee services under the LTIP is recognised over the expected vesting period of the awards.  The expense recognised during the year ended 31 May 2017 is £1,610,790 (2016: £1,351,505), of which £949,395 arises from equity-settled share based payment transactions (2016: £595,665) and £661,395 arises from cash-settled share based payment transactions (2016: £755,841). 

The expense for share based payments made in respect of employee services under the Share Option Plan and the Consultants' Share Option Plan is recognised over the expected vesting period of the awards.  The expense recognised during the year ended 31 May 2017 was £nil (2016: £nil), which arises entirely from equity-settled share based payment transactions. 

The expense for share based payments in respect of "Matching shares" issued under the SIP is recognised in the period the shares are granted to the participating employee.  The expense recognised during the year ended 31 May 2017 is £291,146 (2016: £242,913), which arises entirely from equity-settled share based payment transactions. 

Summary of share options

The following table illustrates the number and weighted average exercise prices ("WAEP") of, and movements in, share options during the year.

Share options	2017 No.	2017 WAEP £	2016 No.	2016 WAEP £
Outstanding as at 1 June	840,499	0.43	835,295	1.17
Granted during the year	294,340	0.01	292,574	0.01
Exercised	(226,841)	1.57	(281,338)	2.19
Forfeited during the year	(200)	0.01	(6,032)	-
Outstanding at 31 May	907,798	0.27	840,499	0.43
Exercisable at 31 May	130,318	1.85	143,925	2.46

The weighted average share price at the date of exercise for share options exercised during the year was £7.31 (2016: £5.48).  For the share options outstanding as at 31 May 2017, the weighted average remaining contractual life is 4.0 years (2016: 4.0 years).  The WAEP for options outstanding at the end of the year was £0.27 (2016: £0.43), with the option exercise prices ranging from £0.01 to £2.79. 

The fair value of equity-settled share options granted is estimated as at the date of grant using the Black Scholes Merton model, taking into account the terms and conditions upon which the options were granted.  The following table lists the inputs to the model used to estimate the fair value of options granted during the year ended 31 May 2017:

	LTIP
Share price at date of grant	£6.55
Option exercise price	£0.01
Expected life of option (years)	4.5
Expected share price volatility (%)	17.5
Dividend yield (%)	2.21
Risk-free interest rate (%)	0.81

The share price at date of grant for options issued under the LTIP is based on the market value of the shares on that date.  The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur.  The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.  No other features of options grant were incorporated into the measurement of fair value.

The share price at 31 May 2017 and movements during the year are set out in the Directors' Remuneration Report.

11. Derivative financial asset

	Group 2017	Company 2017	Group 2016	Company 2016
	£000	£000	£000	£000
Derivative financial asset (Note 9)	110	110	-	-
	110	110	-	-

The only derivative financial instrument held by the Group is an option contract over shares in the Group's associate.  The option contract is carried at fair value. 

12. Cash and short-term deposits

For the purpose of the statement of cashflows, cash and cash equivalents comprise the following at 31 May 2017:

	Group 2017 £000	Company 2017 £000	Group 2016 £000	Company 2016 £000
Cash at banks and on hand	22,979	12,172	29,809	21,381
Bank overdrafts	-	-	-	-
Cash and cash equivalents	22,979	12,172	29,809	21,381

Cash at banks earns interest at floating rates based on daily bank deposit rates.  Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.  The fair value of cash and short-term deposits is £23.0m (2016: £29.8m). 

Due to the headroom the Group's current cash balances provide on its projected working capital requirements, the Group has not renewed its overdraft facility.  Management will continue to review the level of bank facilities the Group may require going forward. 

 

13. Issued capital and reserves

Share capital	Ordinary shares  of 1p	Ordinary shares of 1p £
Authorised
At 1 June 2015, 31 May 2016 and 31 May 2017	30,000,000	300,000
Issued and fully paid
At 1 June 2015	20,372,565	203,726
Placing	3,795,918	37,959
Exercise of employee share options	281,338	2,813
Shares issued under the SIP	99,972	1,000
Shares issued for consideration	655,630	6,556
At 31 May 2016	25,205,423	252,054
Exercise of employee share options	226,841	2,268
Shares issued under the SIP	94,392	944
Shares issued for consideration	262,508	2,625
At 31 May 2017	25,789,164	257,891

Rights, preferences and restrictions on shares

All ordinary shares carry equal rights and no privileges are attached to any shares in the Company.  All the shares are freely transferable, except as otherwise provided by law.  However:

·     The former shareholders of Thoroughbred Wealth Management Limited ("the TWM Sellers") have entered into a lock-in deed with Mattioli Woods and its nominated adviser and broker, Canaccord Genuity Limited, restricting sales of that part of the consideration comprising 946,256 ordinary shares in Mattioli Woods during the four years ending 29 July 2017;

·     The former shareholders of Boyd Coughlan Limited ("the BCL Sellers") have entered into a lock-in deed with Mattioli Woods and its nominated adviser and broker, Canaccord Genuity Limited, restricting sales of that part of the consideration comprising 235,742 ordinary shares in Mattioli Woods during the two years ending 23 June 2017;

·     The former shareholders of Taylor Patterson ("the Taylor Patterson Sellers") have entered into a lock-in deed with Mattioli Woods and its nominated adviser and broker, Canaccord Genuity Limited, restricting sales of that part of the consideration comprising 419,888 ordinary shares in Mattioli Woods during the three years ending 8 September 2018;

·     The former shareholder of Old Station Road Holdings Limited ("the MCT Seller") has entered into a lock-in deed with Mattioli Woods and its nominated adviser and broker, Canaccord Genuity Limited, restricting sales of that part of the consideration comprising 38,081 ordinary shares in Mattioli Woods during the two years ending 6 September 2018; and

·     The former shareholders of Amati Global Investors Limited ("the Amati Sellers") have entered into a lock-in deed with Mattioli Woods and its nominated adviser and broker, Canaccord Genuity Limited, restricting sales of that part of the consideration comprising 224,427 ordinary shares in Mattioli Woods during the two years ending 7 February 2019.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.  All shares rank equally with regard to the Company's residual assets.

Share schemes and share incentive plan

The Company has three share schemes under which options to subscribe for the Company's shares have been granted to certain executives and senior employees (Note 10).

The Company also operates a share incentive plan.  Participants in the SIP are entitled to purchase up to a prescribed number of new ordinary shares in the Company in any year.  At the Directors' discretion, the Company may also award additional shares to participants in the SIP.  Ordinary shares issued under the SIP rank pari passu with existing issued ordinary shares of the Company.  Dividends paid on shares held within the SIP are used to buy new ordinary shares in the Company of 1p each.

 

Other reserves

Group	Share premium £000	Merger Reserve £000	Equity - share based payments £000	Capital redemption reserve £000	Retained earnings £000
At 1 June 2015	8,689	4,838	997	2,000	22,739
Reserve transfer	-	-	(161)	-	161
Share based payments	-	-	596	-	-
Shares issued under the SIP	594	-	-	-	-
Shares issued as initial consideration for BCL and TPL	-	3,693	-	-	-
Shares issued on exercise of options	613	-	-	-	-
Costs of issuing new shares	(693)	-	-	-	-
Current tax taken to equity	-	-	149	-	-
Deferred tax taken to equity	-	-	61	-	-
Profit for the financial year	-	-	-	-	5,245
Dividends paid	-	-	-	-	(2,754)
New shares issued	18,562	-	-	-	-
At 31 May 2016	27,765	8,531	1,642	2,000	25,391
Reserve transfer	-	-	(309)	-	309
Share based payments	-	-	949	-	-
Shares issued under the SIP	699	-	-	-	-
Shares issued as initial consideration for MC Trustees	-	250	-	-	-
Shares issued as initial consideration for 49% interest in Amati	1,737	-	-	-	-
Shares issued on exercise of options	113	-	-	-	-
Current tax taken to equity	-	-	237	-	-
Deferred tax taken to equity	-	-	52	-	-
Profit for the financial year	-	-	-	-	6,356
Dividends paid	-	-	-	-	(3,390)
Share of other comprehensive income from associated company	-	-	-	-	5
At 31 May 2017	30,314	8,781	2,571	2,000	28,671

 

Company	Share premium £000	Merger reserve £000	Equity - share based  payments £000	Capital redemption reserve £000	Retained earnings £000
At 1 June 2015	8,689	4,838	976	2,000	20,048
Reserve transfer	-	-	(140)	-	140
Share based payments	-	-	596	-	-
Shares issued as initial consideration for BCL and TPL	-	3,693	-	-	-
Shares issued under the SIP	594	-	-	-	-
Shares issued on exercise of options	613	-	-	-	-
Deferred tax recognised in equity	-	-	61	-	-
Profit for the financial year	-	-	-	-	5,053
Dividends paid	-	-	-	-	(2,754)
Current tax charge taken to equity	-	-	149	-	-
Costs of issuing new shares	(693)	-	-	-	-
New shares issued	18,562	-	-	-	-
At 31 May 2016	27,765	8,531	1,642	2,000	22,487
Reserve transfer	-	-	(309)	-	309
Share based payments	-	-	949	-	-
Shares issued as initial consideration for MC Trustees	-	250	-	-	-
Shares issued as initial consideration for 49% interest in Amati	1,737	-	-	-	-
Shares issued under the SIP	699	-	-	-	-
Shares issued on exercise of options	113	-	-	-	-
Deferred tax recognised in equity	-	-	52	-	-
Profit for the financial year	-	-	-	-	4,481
Dividends paid	-	-	-	-	(3,390)
Current tax charge taken to equity	-	-	237	-	-
Share of other comprehensive income from associated company	-	-	-	-	5
At 31 May 2017	30,314	8,781	2,571	2,000	23,892

The Company has issued options to subscribe for the Company's shares under three employee share schemes (Note 10).  The cost of exercised or lapsed share options has been derecognised from equity-share based payments and re-allocated to retained earnings as required by IFRS2 Share-based Payments. 

 

The following table describes the nature and purpose of each reserve within equity:

Reserve	Description and purpose
Share premium	Amounts subscribed for share capital in excess of nominal value less any associated issue costs that have been capitalised.
Merger reserve	Where shares are issued as consideration for shares in another company, the excess of the fair value of the shares acquired over the nominal value of the shares issued is recognised in the merger reserve.
Capital redemption reserve	Amounts transferred from share capital on redemption of issued shares.
Equity - share based payments	The fair value of equity instruments granted by the Company in respect of share based payment transactions less options exercised.
Retained earnings	All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.

14. Financial liabilities and provisions

Group	Contingent consideration £000	Client claims £000	Dilapidations £000	Clawbacks £000	Employers' NIC on share options £000	Onerous contracts £000	LTIP cash liability £000	Total £000
At 1 June 2016	5,800	532	413	308	624	152	1,263	9,092
Unwinding of discount	242	-	-				31	273
Arising during the year	890	510	90	132	419		661	2,702
Acquisitions (Note 3)	-	63	30		-	-	-	93
Paid during the year	(2,250)	(387)	-	-	(306)		(1,111)	(4,054)
Unused amounts reversed	(264)	(191)	(16)	(316)	-	(77)		(864)
At 31 May 2017	4,418	527	517	124	737	75	844	7,242
Current 2016	2,299	532	63	308	-	152	-	3,354
Non-current 2016	3,501	-	350	-	624	-	1,263	5,738
At 31 May 2016	5,800	532	413	308	624	152	1,263	9,092
Current 2017	2,830	527	-	124	-	75	844	4,400
Non-current 2017	1,588	-	517		737	-	-	2,842
At 31 May 2017	4,418	527	517	124	737	75	844	7,242

Company	Loan note £000	Contingent consideration £000	Client claims £000	Dilapidations £000	Clawbacks £000	Employers' NIC on share options £000	Onerous contracts £000	LTIP cash liability £000	Total £000
At 1 June 2016	-	5,800	457	350	294	624	118	1,263	8,906
Unwinding of discount	-	242	-	-	-	-	-	31	273
Arising during the year	8,525	890	489	90	127	419	-	661	11,201
Transfer from Group companies	-	-	50	62	1	-	35	-	148
Paid during the year	-	(2,250)	(353)	-	-	(306)	-	(1,111)	(4,020)
Unused amounts reversed	-	(264)	(191)	(15)	(316)	-	(78)	-	(864)
At 31 May 2017	8,525	4,418	452	487	106	737	75	844	15,644
Current 2016	-	2,299	457	-	294	-	118	-	3,168
Non-current 2016	-	3,501	-	350	-	624	-	1,263	5,738
At 31 May 2016	-	5,800	457	350	294	624	118	1,263	8,906
Current 2017	-	2,830	452	-	106	-	75	844	4,307
Non-current 2017	8,525	1,588	-	487	-	737	-	-	11,337
At 31 May 2017	8,525	4,418	452	487	106	737	75	844	15,644

Loan notes due to subsidiary undertakings

On 31 August 2016 the trade and assets of the Taylor Patterson Group Limited and its subsidiaries Taylor Patterson Financial Planning Limited and Taylor Patterson Associates Limited (together "the Business" were transferred to the Company.  The trade and assets were exchanged for loan notes equal to the book value of the assets and assumed liabilities of the Business as at 31 August 2016, attracting annual interest on the outstanding principal at a rate of 3% above the Bank of England base rate.

Contingent consideration

The Group has entered into certain acquisition agreements that provide for contingent consideration to be paid.  Details of these agreements and the basis of calculation of the net present value of the contingent consideration is summarised in Note 3.  The Group estimates the net present value of the financial liability payable within the next 12 months is £2.8m (2016: £2.3m). 

Client claims

A provision is recognised for the estimated potential liability when the Group becomes aware of a possible client claim.  No discount rate is applied to the projected cash flows due to their short term nature.  

Dilapidations

Under the terms of the leases for the Group's premises, the Group has an obligation to return the properties in a specified condition at the end of the lease term.  The Group provides for the estimated net present value of the cost of any dilapidations.  The discount rate applied to the cash flow projections is 5.0%. 

Clawbacks

The Group receives certain initial commissions on indemnity terms and hence the Group provides for the expected level of clawback, based on past experience.  No discount rate is applied to the projected cash flows due to their short term nature. 

Onerous contracts

The Group acquired onerous contracts for the provision of certain IT systems on the acquisition of Ashcourt Rowan's pension business and on the acquisition of UKWM Pensions.  Management has assessed the expected benefits and costs associated with these contracts and concluded that the costs of the obligation exceed the benefits to the extent that it is appropriate to provide against these contracts in full.  

LTIP cash liability

The Group has granted cash settled options to certain Executive Directors.  The amount of any cash entitlement on vesting of an award will be directly linked to the value of a specified number of the Company's shares at the vesting date. 

15. Commitments and contingencies

Operating lease agreements - Group as lessee

Mattioli Woods plc has entered into three commercial leases for its premises at Grove Park, Enderby.  The lease for the Head Office, MW House, has a duration of 20 years, from 10 June 2005.  The amount of annual rental is to be reviewed at three-yearly intervals.  The first lease for part of the ground floor of Gateway House (an office building adjacent to MW House) has a duration of ten years from 1 February 2008.  A second lease for part of the ground floor of Gateway House has a duration of ten years from 1 December 2009.  For both leases, the amount of annual rental is to be reviewed at the end of the fifth year. 

Mattioli Woods plc has also entered into commercial leases for its premises at:

·     8 Queens Terrace, Aberdeen, which expires 31 May 2023.  The annual rental is £148,000;

·     Cheveley House, Fordham Road, Newmarket, which expires on 24 December 2023, with next break clause of 24 December 2018.  The annual rental is £115,500;

·     Lanson House, Winckley Gardens, Mount Street, Preston, which expires on 31 July 2022.  The annual rental is £62,000;

·     Investment House, 22-26 Celtic Court, Ballmoor, Buckingham, which expires on 11 April 2022.  The annual rental is £35,000;

·     Glasgow, 120 West Regent Street, which expires on 31 January 2022. The annual rent is £48,844 plus £2,500 per annum for car parking;

·     Manchester (Fully serviced office), 13^th Floor, Piccadilly Plaza, License expires on 31 October 2017, the annual rent is £16,200;

·     London, 3^rd Floor, 87/89 Baker Street, Lease expires on 31 October 2021. The annual rent is £92,500; and

·     Solihull, Enterprise House, Unit 1, 2 & 3, lease expires on 13 June 2022, with a break on 14 June 2019. The annual rent is £63,434.

As part of certain acquisitions, the Group acquired operating lease obligations for office equipment.  No restrictions were placed upon the Group by entering into these leases.  Future minimum rentals payable under non-cancellable operating leases as at 31 May are as follows:

	Office equipment		Land and buildings
Group	2017 £000	2016 £000	2017 £000	2016 £000
Not later than one year	1	2	867	706
After one year but not more than five years	1	2	3,052	1,724
More than five years	-	-	966	1,130
	2	4	4,885	3,560

	Office equipment		Land and buildings
Company	2017 £000	2016 £000	2017 £000	2016 £000
Not later than one year	1	2	804	627
After one year but not more than five years	1	2	2,798	1,476
More than five years	-	-	964	1,057
	2	4	4,566	3,160

Group operating lease charges during the year were £863,044 (2016: £797,604) for land and buildings and £18,553 (2016: £5,685) for office equipment. 

Capital commitments

At 31 May 2017 the Group had capital commitments amounting to £7.6m (2016: £14.0m).  In August 2015, Mattioli Woods (New Walk) Limited entered into a development agreement with Ingleby (1245) Limited, a company owned and controlled by Sowden Group Limited to build a new 50,000 square foot office on the site of the former Leicester City Council headquarters at New Walk, Leicester. 

The expected expenditure for the development is circa £15.0m including fit out costs and irrecoverable VAT, which will be funded through a combination of existing cash resources, bank funding and future operating cashflows.  Construction commenced in May 2016, with construction scheduled to complete in late 2017 for occupancy in 2018. 

There are pre-existing conditions retained by Leicester City Council over the transfer of title of the land to Mattioli Woods, which the directors are confident will be satisfied on completion of the development.

Sponsorship agreement

In July 2016, the Group entered in to a three-year sponsorship agreement with rugby giants Leicester Tigers to strengthen the Group's brand awareness.  The agreement includes shirt sponsorship on the Tigers' home and away shirts, a dedicated Mattioli Woods stand at the 26,000 capacity Welford Road stadium, corporate hospitality rights and the provision of exclusive content to Tigers fans.  As at 31 May 2017 this agreement still had just over two years to run. 

Client claims

The Group operates in a legal and regulatory environment that exposes it to certain litigation risks.  As a result, the Group occasionally receives claims in respect of products and services provided and which arise in the ordinary course of business.  The Group provides for potential losses that may arise out of contingencies (Note 14). 

In-specie pension contributions

As has been widely reported in the media, HMRC has recently challenged all SIPP providers on whether pension contributions could be made in-specie.  As a result there are a number of tax relief claims made on behalf of our clients that have been challenged and we expect to receive assessment notices which could amount to £0.9m.  These will be appealed. 

Irrespective of the result of HMRC's claims, the impact on the financial position of the Group is expected to be neutral. 

FSCS levy

The arrangements put in place by the Financial Services Compensation Scheme ("FSCS") to protect depositors and investors from loss in the event of failure of financial institutions has resulted in significant levies on the industry in recent years.  

There is uncertainty over the level of future FSCS levies as they depend on the ultimate cost to the FSCS of industry failures. The group contributes to the investment intermediation levy class and accrues levy costs for future levy years when the obligation arises.  No provision has been made in these financial statements for any FSCS interim levy in the year ended 31 May 2017. 

16. Events after the reporting date

Taxation

On 15 September 2016 the Finance Bill 2016 received Royal Assent, therefore enacting proposals that were announced in the 2016 budget, Autumn Statement 2015 and Summer Budget 2015.  The rate of corporation was 20% from April 2015.  This reduced to 19% from April 2017 and will reduce to 17% from April 2020.

These rate changes will affect the amount of future cash tax payments to be made by the Group and will also reduce the size of the Group's deferred tax assets and liabilities in the Group's statement of financial position. 

17. Financial information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 May 2017 or 2016 but is derived from those accounts.  Statutory accounts for 2016 have been delivered to the registrar of companies, and those for 2017 will be delivered in due course.  The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. 

18. Distribution of the annual report and accounts to members

The annual report and accounts will be posted to shareholders in due course, and will be available on our website (www.mattioliwoods.com) and for inspection by the public at the Group's head office address: MW House, 1 Penman Way, Grove Park, Enderby, Leicester LE19 1SY during normal business hours on any weekday.  Further copies will be available on request.

The Company's annual general meeting will take place on 26 October 2017 at the Group's head office. 

 

END

 

 

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