Source - RNS
RNS Number : 4787H
CMC Markets Plc
08 June 2017
 

8 June 2017

 

 

 

 

CMC MARKETS PLC

Final results for the year ended 31 March 2017

Delivering on client growth and strategic initiatives despite lower client trading activity

Year ended

£ million (unless otherwise stated)

31 March

2017

31 March

2016

Change

Net operating income

160.8

169.4

(5)%

Profit before tax

48.5

53.4

(9)%

Earnings per share (pence)

13.7p

15.1p

(9)%

Ordinary dividend per share (pence)

8.9p

8.9p

-

Number of trades (million)

62.7

66.8

(6)%

Value of trades (£ billion)

2,016

2,071

(3)%

Active CFD and Spreadbet clients (numbers)

60,082

57,329

5%

Revenue per active client (£)

2,517

2,828

(11)%

Notes:

Net operating income represents total revenue after commissions payable to introducing partners and betting levies

Active clients represents those individual clients who have traded with or held a CFD or spread bet positions with CMC Markets on at least one occasion during the financial year

Revenue per active client represents total trading revenue from CFD and spread bet active clients after deducting partner commissions and levies

Dividend per share paid or proposed relating to the financial year

 

Highlights

·   Subdued commission and spread income as clients traded less often in quieter markets, with net operating income reducing by 5% to £160.8 million (2016: £169.4 million), resulting in a reduction in profit before tax of 9% to £48.5 million (2016: £53.4 million)

·      Growth in client base with active clients up 5% to 60,082

·      Maintaining strong balance sheet with regulatory total capital ratio of 30% and own funds of £183.4 million

·     Significant progress made on all five strategic initiatives, including signing the largest transaction in CMC's history with ANZ Bank in Australia

·      Proposed final ordinary dividend of 5.95 pence, maintaining prior full year ordinary dividend of 8.93p

·      Financial performance at the start of FY2018 improved on same period in FY2017 with cautious outlook

Regulatory change

·    UK (FCA) consultation: thorough and detailed response provided, likely to lead to an improvement in industry practices and positions the Group well for the future

·    German (BaFin) consultation: mandated introduction of "no additional payment obligation" accounts but did not mandate change to client margins. The Group already has platform functionality developed to meet requirements by 10 August 2017

Progress made on strategic initiatives

·      Established markets: grew primary market share in UK and Australia and maintained market-leading position in Germany

·      Geographic expansion: strong growth in our new and expanding offices in Poland and France

·      Digital: 52% of the value of Next Generation client trades completed on mobile devices

·    New products: rapid delivery of new products, such as Knock-Outs released in Germany, enabled by fully invested,  modular, bespoke platform

·      Institutional: significant growth with the value of client trades increasing 82%

 

Peter Cruddas, Chief Executive Officer of CMC Markets commented:

"Our first full year as a listed company has been one of progress as we have worked hard to position the Group for future growth. It is disappointing that reduced client activity impacted revenue performance for much of the year, but I am pleased that the strength of our platform, team and service proposition has continued to attract new, high quality clients and our existing clients are putting more money to work with us. We have continued to make excellent headway with our five strategic initiatives in 2017 and signed the biggest institutional transaction in our history, our partnership with ANZ Bank. Clearly regulatory change is likely to have some impact on the business but we believe we are well positioned to benefit from market share gains in the medium to long term, with our ability to adapt our leading proprietary technology and focus on client service and regulatory compliance supported by our financial strength."

 

Analyst and Investor Presentation

A presentation will be held for equity analysts and investors today at 9:30 a.m. (BST).

A live audio webcast of the presentation will be available via the following link:

http://webcasts.cmcmarkets.com/results/2017fullyear

Alternatively, you can dial into the presentation:

·      United Kingdom: 020 3059 8125

·      All other locations: + 44 20 3059 8125

Please quote "CMC Markets Full Year Results 2017" when prompted.

 

Annual Report and Financial Statements

A copy of the CMC Markets plc (the "Company") Annual Report and Financial Statements for the year ending 31 March 2017 (the "2017 Annual Report") is available within the Investor Relations section of the Company website http://www.cmcmarkets.com/group/results/annual-reports

Pursuant to Listing Rule 9.6.1 the Company has submitted the 2017 Annual Report to the National Storage Mechanism and will shortly be available for inspection at: www.hemscott.com/nsm.do

In compliance with The Disclosure and Transparency Rules (DTR) 6.3.5, the information in the Appendix below is extracted from the Company's 2017 Annual Report and Financial Statements. This material is not a substitute for reading the 2017 Annual Report and Financial Statements in full and any page numbers and cross references in the extracted information below refer to page numbers and cross-references in the 2017 Annual Report and Financial Statements.

 

Forthcoming announcement dates

Thursday 27 July

Q1 2018 Interim Management Statement

Thursday 28 September

Q2 2018 pre-close trading update

Thursday 23 November

H1 2018 results

 

Media enquiries

Camarco

Geoffrey Pelham-Lane / Ed Gascoigne-Pees / Jennifer Renwick Tel: 020 3757 4994

 

 

Notes to Editors

CMC Markets plc ("CMC"), whose shares are listed on the London Stock Exchange under the ticker CMCX, was established in 1989 and is now one of the world's leading online financial trading businesses. The company serves retail and institutional clients through regulated offices and branches in 14 countries, with a significant presence in the UK, Australia, Germany and Singapore. CMC Markets offers an award-winning, online and mobile trading platform, enabling clients to trade over 10,000 financial instruments across shares, indices, foreign currencies, commodities and treasuries through contracts for difference ("CFDs") and financial spread bets (in the UK and Ireland only). Clients can also place financial binary bets through Countdowns and, in Australia, access stockbroking services. More information is available at http://www.cmcmarkets.com/group/ 

 

Forward Looking Statements

This announcement and Appendix may include statements that are forward looking in nature. Forward looking statements involve known and unknown risks, assumptions, uncertainties and other factors which may cause the actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Except as required by the Listing Rules and applicable law, the Group undertakes no obligation to update, revise or change any forward looking statements to reflect events or developments occurring after the date such statements are published.

 

 

CHAIRMAN'S STATEMENT

Whilst I am pleased to present the Group's results in our first full year since listing on the London Stock Exchange, there is no doubt that the past year has been challenging and disappointing, with net operating income down 5% and underlying profit before tax down 22%. The year-on-year fall in net operating income was primarily driven by more challenging market conditions with sustained periods of significantly lower market volatility, providing fewer trading opportunities for our clients.

The more significant fall in underlying profit before tax of 22% was a function of the lower level of net operating income combined with our continued investment in the strategic growth initiatives, which will drive the medium to long-term growth of the Group. We have made strong progress on each of the strategic initiatives, greater detail of which is included later in the report.

Although the financial performance is disappointing, the underlying fundamentals within the business have continued to improve with a 5% increase in active clients and client money at record levels.

The results for the year have been somewhat overshadowed by the proposals from the UK's Financial Conduct Authority (FCA) and other European regulators as they reform the way that contracts for difference (CFDs) and spread betting products are offered. The Group welcomes strong regulation and is working with regulators throughout the consultation periods, to achieve their objectives. It is likely that once finalised, these changes will impact the profitability of the Group in the short term, although in the medium to long term we believe that the Group will benefit from these changes as smaller operators leave the industry and we grow market share.

Governance and the Board

Prior to the listing in February 2016, we made a number of changes to the Board, strengthening it in a number of key areas. This is the first full year that the Board has been in place and following a formal evaluation process the Board has agreed that it has operated effectively throughout the year. More detail is included in the Nomination Committee report.

Manjit Wolstenholme will be stepping down from the Board at our Annual General Meeting on 27 July 2017. I would like to thank Manjit for her valuable contribution as we prepared for our listing and during our first year as a public company, and wish her every success for the future. We have commenced a thorough search for a successor.

Our people

On behalf of the Board I would like to thank all of our staff for their hard work once again. Their effort and commitment has helped to ensure that we successfully managed the market volatility around the EU referendum as well as other significant market events during the year. The quality of our staff gives me the confidence to know that we will successfully deal with the regulatory changes, Brexit and other events that will impact the operations of the Group in the coming years. We have a considerable talent base in our London head office and intend to maintain the UK as our global headquarters. Continuing investment in our key talent will be an absolute priority for the Board in the coming year.

Dividends

CMC Markets continues to be a highly cash generative business. Whilst the Group's policy is to pay dividends of 50% of underlying profit after tax, given the Group's strong cash position, the Board has decided to maintain the full year total ordinary dividend in line with the prior year.

The Board is recommending a final dividend of 5.95 pence per share, which represents a total ordinary dividend of 8.93 pence per share.

Outlook

2018 will be an important year for the Group as the regulatory changes are finalised and the way the Group will best serve the needs of our clients within that environment becomes clear. With our award winning technology, focus on client service and strong balance sheet, we believe that as the industry adjusts to these changes we will be in a position to emerge as a stronger business, delivering future growth and shareholder value.

 

Simon Waugh

Chairman

7 June 2017
 

 

CEO REPORT

2017 has been a busy and eventful year for CMC Markets, as we completed our first full year as a public company. We have made strong progress on our five strategic initiatives outlined for our investors during the listing process, including signing of a partnership with ANZ, launching new products (binaries and Knock-Outs) and continuing to develop our award winning Next Generation platform.

Our financial performance has been lower than last year driven by lower client activity resulting from an unusual lack of market volatility for large parts of the year. However, active client numbers and client assets have continued to increase. I am therefore confident that we have the right foundations in place for the business moving forwards.

The big industry event of the year, which was outside our control, was the decision of a number of European regulators to announce changes or commence consultations around client appropriateness, minimum retail margins, risk warning amendments, client incentive schemes and marketing of leveraged products.

Our primary focus has been on the consultations within our core markets, in particular the UK and Germany, where the consultation period took place from December 2016 through to March 2017, and we have made thorough and detailed responses. These consultations were initiated as a result of low-quality providers applying low levels of regulatory compliance, questionable sales practices and irresponsible behaviour, primarily from overseas jurisdictions. CMC Markets has always had a strong focus on compliance and service and I am confident that by working with regulators, in the long term, the Group and the industry will emerge in a stronger position.

The recent German regulatory consultation has resulted in the regulator maintaining its initial position which requires the implementation of negative balance protection for retail clients by 10 August 2017, whereby clients cannot lose more than their account balance. The flexibility of our Next Generation platform means that we are able to quickly adapt the platform's functionality to meet these new requirements. We await communication of the outcome of the UK consultation.

The other significant event for CMC Markets during the year, which was specific to the Group, was being chosen by the Australia and New Zealand Bank ("ANZ Bank") to service their stockbroking business, where our technology was one of the main catalysts for winning the transaction. The agreement means we will transfer and service over 250,000 ANZ Bank annual active stockbroking clients from September 2018. CMC Markets is already the largest non-bank retail stockbroker in Australia and this transaction will propel us to the number two position in Australia overall with a 23% market share based on ASX trading statistics.

This transaction is expected to be highly profitable for both CMC Markets and ANZ Bank once we have fully integrated the software and migrated their clients onto our platform which is expected to commence in September 2018. Combined with our existing business we will have in excess of 300,000 annually active stockbroking retail clients, a number of intermediaries and total client assets in excess of A$53 billion. Naturally, for a deal of this magnitude, although revenue streams will not begin for over a year, a project is underway to ensure that the transaction is a success. We are developing additional stockbroking platform functionality, and increasing the property and hardware capacity needed to support the anticipated rise in trading activity and staffing required to service the client base.

CMC Markets targets experienced clients through a more feature rich trading platform and excellent client service. Our award-winning, proprietary Next Generation platform was specifically built to attract more experienced clients and, more importantly, to retain them. We aim to have a long relationship with our clients and this has been achieved as illustrated through the fact that approximately 32% of our active clients have been with us for over three years which is significantly higher than the industry average.

In addition to our Next Generation platform, we employ experienced sales trading teams that are available to speak to clients any time and keep them updated on market movements. We also target experienced stockbroking clients through our Pro platform in Australia. Overall globally we won 34 awards for service, platform and technology during the year.

I founded CMC Markets in 1989 and over the intervening years the business has grown and has dealt with many periods of significant change; in many cases we have pioneered the change. This has included embracing the internet and new technologies including mobile and adapting to regulatory change. I love being at the helm of the business and I plan to steer us through any proposed regulatory changes ahead. That is what I have done successfully for 27 years and will continue to do going forward.

 

Financial performance and KPIs

Over the year, global markets were less volatile than historically, particularly in our major asset class, Indices, and despite short-term volatility around the EU referendum and US presidential election, this ultimately led to fewer trading opportunities for our clients. Against this backdrop of low levels of market volatility, particularly in the first half, clients traded less than the prior year with net operating income being 5% lower than the prior year at £160.8 million. Operating expenses before exceptional costs increased by 6% to £105.8 million, due to increased investment in marketing and higher staff costs.

Profit before tax was £48.5 million, a 9% decrease on the prior year, driven by the reduced net operating income and the low level of variable cost within the business. However, with this operational leverage we anticipate that when revenues increase there will be a low incremental increase in cost, and therefore believe that our strong client metrics are a good foundation for future earnings growth. Own funds generated from operating activities were £47.0 million for the year ended 31 March 2017 and the Group continues to have a strong regulatory total capital ratio of 31.5% as at 31 March 2017.

Although the Group's policy is to pay 50% of profit after tax as dividends, given the Group's strong cash generation and liquidity position, the Board has recommended to maintain last year's total ordinary dividend and pay a final dividend of 5.95 pence per share despite the lower earnings.

Active clients have increased by 5% for the Group to 60,082; however a 6% reduction in the number of trades and a 3% decrease in the value of those trades contributed to a fall in overall revenue per active client (RPC) of 11% to £2,517. Although lower than the prior year, RPC remains amongst the highest in the industry and is a reflection of the quality of our client base. RPC is presented net of retail and Institutional client rebates, which were £9.9 million for the year, a decrease of 6% from the prior year.

2017 has generally been a good year for overall client acquisition for the CFD and spread betting businesses, with new clients increasing by 13% compared to the prior year. Our stockbroking business has seen client acquisition increase by 20%.

Regional review

The UK continues to be Group's largest market; net revenue1 fell by 3% although the value of trades increased by 6%. The value of trades saw an increase in lower margin institutional business offset by a large decrease in Indices business.

In Europe net revenue fell by 7% marginally higher than the reduction in the value of trades, whilst in APAC & Canada net revenue decreased by 11%, again slightly higher than the value of trades.

We are pleased to have increased our primary market share in the UK, maintained our number one market position in Germany and continue to be the number one CFD provider to high value clients in Australia according to independent Investment Trends research.

1 Net revenue generated from CFD and spread bet active clients

Strategic progress

Despite the regulatory uncertainty, we continue to focus on our clear strategy to grow the business in the future around five strategic initiatives, and underpinning each of these is our continuing focus on client service, innovation and technology.

When looking solely at financial performance, it has been a mixed year for the initiatives, but we are continuing to make progress across each of them, and will continue to refine them as the regulatory outlook becomes clear.

In our established markets, the lacklustre market activity has been the main driver of lower revenue by reducing the number of trading opportunities for existing and returning business. In addition, our increasing marketing spend has also not had the expected impact on new accounts, with cost per acquisition flat on the prior year.

 

Regarding new markets and developing regions, our Poland office has shown good growth since its launch in October 2015, but in size it remains immaterial to the Group at present with a contribution of 1% of net revenue. Despite regulatory change in France, another year of growth has been achieved.. We have also incorporated an education entity in China in readiness to open an office in Shanghai in the first few months of the new financial year.

From a digital perspective, we have focussed on our mobile marketing capabilities, whilst also continuing to improve websites and the client journey.

Our institutional business, where we offer white and grey label and API1 connectivity to banks and brokers worldwide, continues to grow and CMC Markets had 154 active institutional relationships during the year, an increase of 43% against the prior year. This growth in clients contributed to a 38% increase in net revenue to £22.7 million.

Throughout the year we have continued to make improvements and enhance our award winning Next Generation technology. Innovation is core to the Group and during the year we successfully launched our full binary offering, the 'Knock-Out' product in Germany and continued to improve our API1 offering to institutional clients. In the coming months the platform will be upgraded to HTML5 which will help to provide additional flexibility in the future, as well as maintain our leading position in technology against our peeHaving returned as the Group's full time CEO in 2013, the hard work in developing our technology, platform and premium client strategy is giving us a clear advantage. Our technology innovation is hugely valuable and important to our clients and our business. It is key to our future growth and scalability and we continue to invest in technology as a platform for our success. Owning and developing the key components of our platform software means we are able to innovate rapidly, driving our business forward and responding to the needs of our clients and our regulators.

In the last year or so I have visited our offices in Australia, New Zealand, Singapore, Germany, Austria, Dubai (major partner) and there continue to be many opportunities around the world for us as a business.

I would like to thank our staff for their continued hard work and dedication throughout the year. We have very talented people across all areas of the Group and their commitment is key to our future success.

I would also like to thank our clients for their continued support. We strive to provide the best levels of service and a great trading experience to our clients, and during the year I have met many of our clients from across the globe. The feedback we get is invaluable and vital to our ongoing success, ensuring we meet or exceed our clients' needs.

I believe that becoming a public company in 2016 was the right decision for the business, as there is no doubt that being listed provides us with additional opportunities. Some of the institutions and clients we are speaking to would only work with us if we were a public company.

It has been a transitional year and I am looking forward to our future. Over the coming year the regulatory uncertainty will reduce and we can continue to move forward. These are exciting times for the Group as we progress our diversification across different continents, products and technology. For now the sector is shrouded in uncertainty around regulatory change, but for CMC Markets development and innovation continue as they have done for 27 years and I firmly believe that the Group will be a long term beneficiary of the expected improvements in the industry in the future

 

 

Peter Cruddas

Chief Executive Officer

7 June 2017

 

 

 

 

 

 

 

¹ Electronic connectivity to the CMC Markets trading platform

 

 

Financial review

Summary income statement 

£m

2017

2016

Variance

Variance%

Net operating income

160.8

169.4

(8.6)

(5)%

Other income

-

3.1

(3.1)

-

Operating expenses

(105.8)

(112.3)

6.5

(6)%

EBITDA

55.0

60.2

(5.2)

(9)%

Analysed as:

 

 

 

 

EBITDA before exceptional items

55.0

69.2

(14.2)

(20)%

Net exceptional items1

-

(9.0)

9.0

-

EBITDA

55.0

60.2

(5.2)

(9)%

Depreciation and amortisation

(5.8)

(6.0)

0.2

4%

Finance costs

(0.7)

(0.8)

0.1

5%

Profit before tax

48.5

53.4

(4.9)

(9)%

Analysed as:

 

 

 

 

Underlying profit before tax

48.5

62.4

(13.9)

(22)%

Net exceptional items1

-

(9.0)

9.0

-

Profit before tax1

48.5

53.4

(4.9)

(9)%

 

 

 

 

 

Underlying PBT margin

30.1%

36.8%

(6.7)%

-

PBT margin

30.1%

31.5%

(1.4)%

-

 

 

 

 

 

Profit after tax

39.2

42.5

(3.3)

(8)%

Underlying profit after tax2

39.2

50.7

(11.5)

(23)%

 

 

 

 

 

Pence

2017

2016

Variance

Variance%

Basic EPS

13.7

15.1

(1.4)

(9)%

Underlying Basic EPS

13.7

18.0

(4.3)

(24)%

1 Consists of £3.1 million exceptional income and £12.1 million exceptional costs in 2016

2 Based on implied tax payable should exceptional items not have been incurred

Summary

Net operating income for the year reduced by £8.6 million (5%) to £160.8 million, primarily driven by subdued markets during the year presenting fewer trading opportunities for our clients. Second half performance was higher than in the first half, assisted by growing active client numbers and improved trading opportunities for our clients around the November US presidential election and January's inauguration.

Active client numbers have risen by 2,753 (5%) to 60,082, mainly as a result of higher marketing spend during the year driving retail client acquisition, as well as the expansion of the institutional offering. However, revenue per active client fell by £311 (11%) to £2,517 due to a fall in the value of client trades, which was £55 billion (3%) lower than prior year at £2,016 billion. Our major asset class, Indices, was the driver of this decrease with the value of client trades down £244 billion (18%) to £1,124 billion. Equity indices have generally been trading within narrow bands during the period, resulting in clients having more limited trading opportunities. The value of client trades in other asset classes grew during the period, offsetting much of the decrease.

Total costs1 decreased by £6.8 million (6%) to £112.3 million. Excluding exceptional costs of £12.1 million in the prior year, total costs increased by £5.3 million (5%). The underlying increase was driven by higher personnel costs, caused by the annualised cost increase associated with investment in personnel during the prior year, increased marketing activity, and higher share based payments. These increases were partially mitigated by lower performance related pay.

EBITDA and underlying EBITDA decreased by £5.2 million (9%) and £14.2 million (20%) respectively to £55.0 million.

Underlying profit before tax decreased by £13.9 million (22%) to £48.5 million, as a result of the £8.6 million decrease in net operating income and £5.3 million increase in underlying total costs explained above, and as a result our underlying profit before tax margin decreased by 6.7% to 30.1%.

Statutory profit before tax decreased by £4.9 million (9%) to £48.5 million and profit before tax margin2 decreased by 1.4% from 31.5% to 30.1%.

It is anticipated that regulatory change is likely to take place in two of our three established markets during the next financial year, although this has had no impact on client activity in the current period.

1 Total costs are the sum of operating expenses, depreciation, amortisation and finance costs

2 Statutory profit before tax as a percentage of net operating income

 

Net operating income overview 

£m

2017

2016

CFD and spread bet (including binaries) net revenue

151.3

162.2

Stockbroking

7.8

5.2

Interest income

1.7

1.8

Other operating income

-

0.2

Net operating income

160.8

169.4

Retail client rebates, included within net operating income, decreased by £0.7 million (6%) to £9.9 million.

Partner and institutional commissions have grown against the prior year, as the Next Generation institutional offering continued to expand.

 

 

Regional performance overview: CFD and spread bet 

 

2017

2016

% change

 

Net revenue (£m)

Value of trades (£bn)

Active Clients

RPC (£m)

Net revenue (£m)

Value of trades (£bn)

Active Clients

RPC (£m)

Net revenue (£m)

Value of trades (£bn)

Active Clients

RPC (£m)

UK

61.0

793

17,142

3,558

63.1

746

17,268

3,652

(3)%

6%

(1)%

(3)%

Europe

45.3

632

22,503

2,012

48.5

672

21,714

2,234

(7)%

(6)%

4%

(10)%

APAC & Canada

45.0

591

20,437

2,201

50.6

653

18,347

2,760

(11)%

(10)%

11%

(20)%

Total

151.3

2,016

60,082

2,517

162.2

2,071

57,329

2,828

(7)%

(3)%

5%

(11)%

UK

The value of client trades in the UK was 6% ahead of the prior year at £793 billion (2016: £746 billion), driven by the institutional business which rose by 76% to £224 billion (2016: £127 billion) following strong growth across all delivery channels, most noticeably API. However the value of client trades in the retail business was down 8% at £569 billion (2016: £619 billion) through reduced trading opportunities. The annual Investment Trends study1 highlighted an increase in primary market share for CMC Markets to 8%, although active clients were broadly flat for the year at 17,142 (2016: 17,268). Revenue per active client was 3% lower than the prior year at £3,558 (2016: £3,652).

Europe

Europe comprises offices in Austria, France, Germany, Italy, Norway, Poland, Spain and Sweden. The value of client trades in Europe was 6% lower than the prior year at £632 billion (2016: £672 billion). While active clients were 4% higher at 22,503 (2016: 21,714), revenue per active client was 10% lower than the prior year at £2,012 (2016: £2,234) due to lower client trading and an increase in active clients in the latter part of the year. A market leading position was maintained in Germany with a 16% share of primary accounts according to the Investment Trends survey2 published in June 2016. There was also a strong performance from France with the value of client trades up 26% from the prior year and active clients up 10% over the same period. The Poland office continues to grow with results ahead of expectation.

APAC & Canada

Our APAC & Canada business services clients from our Sydney, Auckland, Singapore and Toronto offices along with other regions where we have no physical presence. The value of client trades was 10% lower at £591 billion (FY16: £653 billion). Despite the decrease in overall trading activity, active client numbers were up 11% at 20,437 (FY16: 18,347).

CMC increased its primary market share and doubled its net promoter score to remain the number two FX provider in Australia as well as maintaining the position of number one CFD provider for high value clients3. In addition, the Group retained the number one position as CFD provider to high value clients in Singapore3. This demonstrates success in the Group's strategy goal to acquire and support a high value client base. These independent reports also showed that CMC Markets had the highest prompted brand awareness in the Australian market, demonstrating that the brand profile is continuing to build strength in the region.

 

1 Investment Trends October 2016 UK Leveraged Trading Report

2 Investment Trends June 2016 Germany CFD & FX Report

3 Investment Trends 2016 Australia CFD Report; Investment Trends 2016 Singapore Report

 

Stockbroking

The Australian stockbroking business has again significantly improved on the prior year's performance, with revenue up 49% at £7.8 million (2016: £5.2 million), aided by a lower central bank rate, continued supportive market conditions and the benefit of a strengthening Australian dollar. Positive performance was also evidenced through both strong client acquisition (20% increase in new clients1 year-on-year) and improved cross-sell delivered from fundamental improvements in on-boarding and digital marketing. In particular, the latest release of our award winning2 HTML 5 'Pro Platform' helped contribute to a 43% improvement in volumes.

In addition to the numerous intermediary and broader wholesale deals executed in the year, the business signed a major stockbroking partnership with ANZ Bank to service the entire ANZ Share Investing ("ANZSI") client base. CMC will provide these clients with leading technology, customer service and execution via an ANZ-branded stockbroking platform with revenue being shared between CMC and ANZ Bank from September 2018 onwards when clients are migrated. CMC are developing additional stockbroking platform functionality and will be investing in property and IT infrastructure in order to support the rise in trading activity.

Interest income

The low interest rate environment remained largely the same as the prior year and interest income remained stable at £1.7 million (2016: £1.8 million). The majority of the Group's interest income is mainly earned through our segregated client deposits in our Australia, New Zealand and stockbroking subsidiaries.

Other income

All other income in the prior year of £3.1 million relates to a litigation settlement and given its one-off nature, the Group classed the income as exceptional.

 1 New stockbroking accounts net of one-off migrations

2 Canstar 2017 Broker of the Year

 

Expenses

Total operating expenses before exceptional costs increased £5.6 million (6%) to £105.8 million, driven by higher salary costs, share based payment charges, sales and marketing expenditure and IT costs, offset by lower performance related pay.

Exceptional costs of £12.1 million in the prior year relate to the London Stock Exchange listing in February 2016.

£mm£m£m£m

2017

2016

Staff costs

49.4

46.1

IT costs

15.4

12.7

Sales and marketing costs

21.8

18.3

Premises costs

5.2

4.8

Legal and professional fees

3.5

3.1

Regulatory fees 1

2.6

3.2

7.9

12.0

Total operating expenses before exceptional costs

105.8

100.2

-

12.1

Total operating expenses

105.8

112.3

Depreciation and amortisation

5.8

6.0

Interest

0.7

0.8

Total costs

112.3

119.1

1 Includes regulatory transaction fees

Staff costs

Staff costs increased £3.3 million (7%) to £49.4 million, largely caused by a rise in wages and salaries of £5.4 million (15%) due to the annualised impact of investment in personnel in the prior year, and higher share based payments which increased by £3.3 million. These increases were offset by a decrease of £5.3 million (60%) in performance related pay and decrease of £0.1m in contract staff costs.

£m

2017

2016

Wages and salaries

39.9

34.5

Performance related pay

3.4

8.7

Share-based payments

4.4

1.1

Total employee costs

47.7

44.3

Contract staff costs

1.7

1.8

Staff costs

49.4

46.1

Sales and marketing costs

Sales and marketing costs increased £3.5 million (19%) to £21.8 million during the year as the Group continued to invest in its brand profile and growing the client base through higher expenditure across digital channels. Brand activity included the continuing sponsorship of both the Land Rover BAR America's Cup sailing team and the New South Wales Waratahs rugby team in Australia.

Aside from the brand spend, the main increases in expenditure were seen in our established markets of the UK, Germany and Australia.

 

Other expenses

IT costs increased £2.7 million (21%) to £15.4 million, due to additional expenditure in new services, including the cyber security area, increased market data costs and inflationary pressures caused mainly by Sterling depreciation.

Other costs decreased by £4.1 million (34%) to £7.9 million, with the main contributors being lower bad debt expenses due to more benign market conditions, lower irrecoverable sales tax and the effect of favourable balance sheet revaluation.

Taxation

The effective tax rate for the year was 19% (2016: 20%). The majority of the Group's profits are taxed in the UK, which had a corporation tax rate of 20% (2016: 20%). The Group benefited from higher utilisation of Australian corporation tax credits in the year, and in the prior year the effective tax rate was impacted by disallowable exceptional costs associated with the listing.

Profit after tax for the year

The decrease in profit after tax for the year of £3.3 million (8%) to £39.2 million (2016: £42.5 million) was due to both lower net operating income and higher underlying operating costs, explained earlier, offset by no net exceptional items in the year.

Dividend

Dividends of £23.9 million were paid during the year (2016: £24.9 million), £15.4 million relating to a final dividend for the prior year paid in September 2016, with a £8.5 million interim dividend paid in December 2016 in relation to the current year performance. The Group remains committed to a dividend policy of paying 50% of underlying post-tax profit as dividends, however has proposed maintaining the year ended 31 March 2016 ordinary dividend for the year ended 31 March 2017.

 

 

Group statement of financial position

£m

2017

2016

Intangible assets

2.1

2.6

Property, plant and equipment

18.2

16.4

Deferred tax assets

8.1

7.7

Total non-current assets

28.4

26.7

Trade and other receivables

31.6

20.9

Derivative Financial instruments

1.9

0.8

Financial investments

20.3

20.4

Amount due from brokers

119.4

84.2

Cash and cash equivalents

53.2

78.3

Total current assets

226.4

204.6

Total assets

254.8

231.3

Trade and other payables

36.3

34.6

Derivative Financial instruments

3.3

5.0

Borrowings

5.8

1.4

Current tax payable

5.5

7.8

Short term Provisions

0.4

0.2

Total current liabilities

51.3

49.0

Trade and other payables

3.1

3.5

Borrowings

3.0

1.1

Deferred Tax liabilities

0.0

0.0

Long term Provisions

1.6

1.4

Total non-current liabilities

7.7

6.0

Total liabilities

59.0

55.0

Total equity

195.8

176.3

Total equity and liabilities

254.8

231.3

Non-current assets

The Group is committed to maintaining its Next Generation trading platform and these costs are expensed as incurred. The majority of intangible assets relate to the net book value of software licences rather than net capitalised internal development costs. Expenditure on the trading platform goes hand-in-hand with the hardware required to support trading activity and this has been the main driver of the increase in property, plant and equipment over the period.

Current assets

Trade and other receivables relate mainly to client receivables from stockbroking positions yet to settle, prepayments, amounts due from our segregated client accounts on the next working day and other client debtors. The year-on-year rise is as a result of higher stockbroking positions yet to settle. Amount due from brokers relates to cash held at brokers either for initial margin or to reduce interest payable on the Group's overall hedge position. Cash and cash equivalents have decreased during the course of the year with a proportion being deposited with brokers to fund growing margin requirements. Financial investments relate to the FCA BIPRU12 requirement to hold eligible assets against potential liquidity stress.

Current liabilities

Trade and other payables consist mainly of accruals and deferred income, amounts due on stockbroking trades yet to settle, and amounts due to clients in relation to title transfer funds.

 

Non-current liabilities

Trade and other payables relate mainly to the deferred unwinding of lease incentives on our London property and the increase in borrowings is due to a new lease agreement associated with IT equipment purchases.

Regulatory capital resources

For the year under review, CMC Markets was supervised on a consolidated basis by the FCA. The Group maintained a significant capital surplus over the regulatory requirement at all times.

The Group's total capital resources increased due to the rise in retained earnings relating to audited 2017 profits and lower intangible assets on the balance sheet.

At 31 March 2017 the Group had a total capital ratio of 30.2% (31 March 2016 31.2%). The following table summarises the Group's capital adequacy position at the year end. The Group's approach to capital management is described in note 29 to the financial statements.

 

2017

2016

Total capital resources (£m)

171.9

154.3

Total risk exposure (£m)

569.4

494.9

Total capital ratio (%)

30.2%

31.2%

Note: capital resources include audited reserves and any changes to deferred tax assets resulting from the audit process and proposed dividends.

Liquidity

The Group has access to the following sources of liquidity that make up total available liquidity:

·      Own funds. The primary source of liquidity for the Group. It represents the funds that the business has generated historically, including any unrealised gains / losses on open hedging positions. All cash held on behalf of segregated clients is excluded. Own funds consists mainly of cash and cash equivalents and also includes investments in UK government securities which are held to meet the Group's liquid asset buffer (LAB - as set by the FCA). These UK government securities are BIPRU 12.7 eligible securities and are available to meet liabilities which fall due in periods of stress.

·      Title Transfer Funds (TTFs). This represents funds received from professional clients and eligible counterparties (as defined in the FCA Handbook) that are held under a Title Transfer Collateral Agreement (TTCA); a means by which a professional client or eligible counterparty may agree that full ownership of such funds is unconditionally transferred to the Group. The Group considers these funds as an ancillary source of liquidity and places no reliance on its stability.

·      Available committed facility. (Off balance sheet liquidity). The Group has access to a facility of up to £40.0 million (2016: £40.0 million) in order to fund any potential fluctuations in margins required to be posted at brokers to support the risk management strategy. The maximum amount of the facility available at any one time is dependent upon the initial margin requirements at brokers and margin received from clients. The facility consists of a one-year term facility of £20.0 million and a three-year term facility of £20.0 million, both of which will be renewed during June 2017. There was no drawdown on the facility at 31 March 2017 (2016: £nil).

The Group's use of total available liquidity resources consist of:

·      Blocked cash. Amounts held to meet the requirements of local market regulators and amounts held at overseas subsidiaries in excess of local segregated client requirements to meet potential future client requirements.

·      Initial margin requirement at broker. The total GBP equivalent initial margin required by prime brokers to cover the Group's hedge derivative positions.

At 31 March 2017, the Group held cash balances of £49.0 million (2016: £78.3 million). In addition, £310.0 million (2016: £226.1 million) was held in segregated client money accounts for clients. The movement in Group cash and cash equivalents is set out in the Consolidated Cash Flow Statement.

Own funds have increased to £183.4 million (2016: £176.4 million). Own funds include short-term financial investments, amounts due from brokers and amounts receivable / payable on the Group's derivative financial instruments. For more details refer to note 29 of the financial statements.

£m

2017

2016

Own funds

183.4

176.4

Title transfer funds

3.8

2.2

Available committed facility

40.0

25.5

Total available liquidity

227.2

204.1

Less: Blocked cash

(19.8)

(14.9)

Less: Initial margin requirement at broker

(93.0)

(54.7)

Net available liquidity

114.4

134.5

Of which: held as liquid assets buffer

20.0

20.0

 

Client money

Total client money held by the Group on behalf of its retail clients including regulatory buffers held in client money bank accounts was £317.5 million at 31 March 2017 (2016: £230.7 million). Client money is held by the Group in trust for its retail clients and is not included in total available liquidity.

Client funds represent the capacity for our clients to trade and offer an underlying indication to the health of our client base.

Client money governance

The Group segregates all money held by it on behalf of retail clients in accordance with applicable client money regulations in countries in which it operates. The majority of client money requirements fall under the CASS rules of the FCA. All segregated client funds are held in dedicated client money bank accounts with major banks that meet strict internal criteria and are held separately from the Group's own money.

The Group has comprehensive client money processes and procedures in place to ensure client money is identified and protected at the earliest possible point after receipt as well as governance structures which ensure such activities are effective in protecting client money. The Group's governance structure is explained further in the 2017 annual report.

  

PRINCIPAL RISKS

The Group's business activities naturally expose it to strategic, financial and operational risks inherent in the nature of the business it undertakes and the financial, market and regulatory environments in which it operates. The Group recognises the importance of understanding and managing these risks and that it cannot place a cap or limit on all of the risks to which the Group is exposed. However, effective risk management ensures that risks are managed to an acceptable level.

The Board, through its Group Risk Committee, is ultimately responsible for the implementation of an appropriate risk strategy, which has been achieved using an integrated Risk Management Framework. The main areas covered by the Risk Management Framework are:

·      identification, evaluation and monitoring of the principal risks to which the Group is exposed;

·      setting the Risk Appetite of the Board in order to achieve its strategic objectives; and

·      establishment and maintenance of governance, policies, systems and controls to ensure the Group is operating within the stated Risk Appetite.

The Board has put in place a governance structure which is appropriate for the operations of an online retail financial services group and is aligned to the delivery of the Group's strategic objectives. The structure is regularly reviewed and monitored and any changes are subject to Board approval. Furthermore, management regularly considers updates to the processes and procedures to embed good corporate governance throughout CMC Markets. 

As part of the Group Risk Management Framework, the business is subject to independent assurance by internal audit (third line of defence). The use of independent compliance monitoring, risk reviews (second line of defence) and risk and control self-assessments (first line of defence) provide additional support to the integrated assurance programme and ensure that the Group is effectively identifying, managing and reporting its risks.

The Group continues to make enhancements to its Risk Framework and governance to provide a more structured approach to identifying and managing the risks to which it is exposed.

The Board has undertaken a robust assessment of the principal risks facing the Group. Top and emerging risks are considered including those that would threaten its business model, future performance, solvency or liquidity and how they are managed or mitigated (Code C.2.1). These are outlined below and details of financial risks and their management are set out in note 29 to the 2017 financial statements.

Top and emerging risks during the year, which form either a subset of one or multiple principal risks, and continue to be at the forefront of the Group discussions are:

·      UK and Germany regulatory change: there have been significant developments in this area during the financial year which could materially affect the Group's profitability, in particular consultation papers issued by the UK's FCA and Germany's BaFin, with the outcome of the latter recently communicated. The change in regulatory sentiment has been regularly discussed at Board, Board Committee and Executive Committees throughout the year and is actively monitored.

·      UK's exit from the European Union (Brexit): the potential impact of Brexit is being closely monitored and contingencies discussed and planned which would mitigate regulatory change and strategic/business model risk of operating in the European Union.

Further information on the structure and workings of Board and Management committees is included in the Corporate Governance report in the 2017 annual report.

Principle Risk

Risk

Description

Management and mitigation

Business and strategic risks

Regulatory change

The risk that changes to the regulatory framework the Group operates in impacts the Group performance.

Such changes could result in the Group's product offering becoming less profitable, more difficult to offer to clients or an outright ban on the product offering in one or more of the countries where the Group operates.

·  Active dialogue with regulators and industry bodies.

·  Monitoring of market and regulator sentiment towards the product offering.

·  Monitoring by and advice from Compliance department on impact of actual and possible regulatory change.

·  A business model and proprietary technology that is responsive to changes in regulatory requirements.

 

Acquisitions and disposals

The risk that mergers, acquisitions, disposals or other partnership arrangements made by the Group do not achieve the stated strategic objectives or that they give rise to on-going or previously unidentified liabilities.

·  Robust Corporate Governance structure including strong challenge from independent Non-Executive Directors.

·  Vigorous and independent due diligence process.

·  Align and manage the businesses to Group strategy as soon as possible after acquisition.

 

Strategic / business model risk

The risk of an adverse impact resulting from the Group's strategic decision-making as well as failure to exploit strengths or take opportunities. It is a risk which may cause damage or loss, financial or otherwise to the Group as a whole.

·  Strong governance framework established including three independent Non-Executive Directors and the Chairman sitting on the Board.

·  Robust governance, challenge and oversight from independent Non-Executive Directors

·  Managing the Group in line with the agreed strategy, policies and risk appetite.

·  Group Risk is involved in the annual budgeting process.

 

Reputational risk

The risk of damage to the Group's brand or standing with shareholders, regulators, existing and potential clients, the industry and the public at large.

 

·  The Group is conservative in its approach to reputational risk and operates robust controls to ensure significant risks to its brand and standing are appropriately mitigated. Examples include:-

·      Proactive engagement with the Group's regulators and active participation with trade and industry bodies.

·      Positive development of media relations with strictly controlled media contact.

Financial risks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit and counterparty risk

The risk of a client, custodian or counterparty failing to fulfil contractual obligations, including settlement, resulting in financial loss for the Group. Specifically:

Client credit risk:

Financial losses may be incurred in cases where the adverse price move exceeds the margin that a client holds to maintain their position, followed by the client defaulting against their contractual obligations to pay the deficit.

Counterparty credit risk:

A financial institution failing to meet or defaulting on their obligations in accordance with agreed terms.

 

 

 

Client credit risk:

The Group's management of client credit risk is significantly aided by automatic liquidation functionality where margin levels are continuously reviewed. If they fall below pre agreed levels, the positions held on the account will automatically be closed out.

Other platform functionality mitigates risk further:

·      Tiered margin requires clients to hold more collateral against bigger or higher risk positions.

·      Mobile phone access allowing clients to manage their portfolios on the move.

·      Guaranteed Stop Loss Orders allow clients to remove their chance of debt from their position(s).

However, after mitigations, there is a residual risk that the Group could incur losses relating to clients moving into debit balances if there is a market gap.

Counterparty credit risk:

Risk management is carried out by a central Liquidity Risk Management (LRM) team under the Counterparty Concentration Risk Policy, approved by the Board of Directors.

Mitigation is achieved by:

·      Monitoring concentration levels to counterparties and reporting these internally/externally on a monthly/quarterly basis.

·      Monitoring the credit ratings and Credit Default Swap (CDS) spreads of counterparties and reporting internally on a weekly basis.

Further information is available in note 29 to the financial statements.

Financial reporting risk

The risk that financial, statutory or regulatory reports are submitted late, incomplete or are inaccurate.

 

·  Robust process of checking and oversight in place to ensure accuracy.

·  Knowledgeable and experienced staff undertake and overview the relevant processes.

Insurance risk

The risk that an insurance claim by the Group is declined (in full or in part) or there is insufficient insurance coverage.

 

·  Reputable broker deals with insurance and ensures cover is placed with financially secure insurers.

·  Comprehensive levels of cover maintained.

·  Rigorous claim management procedures are in place with the broker.

·  The Board's appetite for uninsured risk is low and as a result the Group has put in place established comprehensive levels of Insurance cover.

Liquidity risk

The risk that there is insufficient available liquidity to meet the liabilities of the Group as they fall due.

Risk management is carried out by a central Liquidity Risk Management (LRM) team under policies approved by the Board and in-line with the FCA's ILAS regime. The Group utilises a combination of liquidity forecasting and stress testing to identify any potential liquidity risk both during normal and stressed conditions. The forecasting and stress testing fully incorporates the impact of all liquidity regulations in force in each jurisdiction and other impediments to the free movement of liquidity around the Group.

Risk is mitigated by:

·      The provision of timely daily, weekly and monthly liquidity reporting and real-time broker margin requirements to enable strong management and control of liquidity resources.

·      A committed bank facility of up to £40 million to meet short-term liquidity obligations to broker counterparties in the event that the Group does not have sufficient access to its own cash.

·      A formal Contingency Funding Plan (CFP) is in place that is designed to aid senior management to assess and prioritise actions in a liquidity stress scenario.

For more information see note 29 to the financial statements.

 

Market risk

Market risk is defined as the risk that the value of our residual portfolio will decrease due to changes in market risk factors. The three standard market risk factors are price moves, interest rates and foreign exchange rates.

 

Trading risk management monitors and manages the exposures it inherits from clients on a real time basis and in accordance with Board approved appetite.

CMC Markets predominantly acts as a market maker in linear, highly liquid financial instruments in which it can easily neutralise all market risk exposure through its prime broker (PB) arrangements. This significantly reduces the Group's revenue sensitivity to individual asset classes and instruments.

Financial risk management runs stress scenarios on the residual portfolio, comprising a number of single and combined, company specific and market-wide events in order to assess potential financial and capital adequacy impacts to ensure the Group can withstand severe moves in the risk drivers it is exposed to.

For further information see note 29 to the financial statements.

Operational risks

Business change risk

The risk that business change projects are ineffective, fail to deliver stated objectives, or result in resources being stretched to the detriment of business as usual activities. Notable business change risks for the Group are platform upgrades and the implementation of the ANZ Bank stockbroking partnership.

 

·  Governance process in place for all business change programmes with Executive and Board oversight and scrutiny.

·  Key users engaged in development and testing of all key change programmes.

·  Significant post-implementation support, monitoring and review procedures in place for all change programmes.

·  Strategic benefits and delivery of change agenda communicated to employees.

Business continuity & disaster recovery risk

The risk that a physical business continuity event or system failure results in a reduced ability or inability to perform core business activities or processes.

·  Business continuity oversight provided by Operational Risk Function.

·  Use of external specialist premises to enhance resilience in the event of a disaster recovery or business continuity requirement.

·  Periodic testing of business continuity processes and disaster recovery.

·  Prompt response to significant systems failures or interruptions.

Financial crime risk

 

Financial crime covers a number of unlawful activities including fraud (first and third party), theft, scams, confidence tricks, tax evasion, bribery, embezzlement, identity theft, money laundering, forgery, counterfeiting and acts of terrorism.

 

·  Adoption of the risk based approach to financial crime, including undertaking formal and regular risk assessments across global operations.

·  Global reporting procedures and surveillance processes in place using local compliance and legal expertise.

·  Regular and on-going training and awareness programme in place for staff at all levels and in all jurisdictions.

·  Group whistleblowing policy provides a clear framework for escalation of issues.

Information and data security risk

 

 

The risk of unauthorised access to or external disclosure of client or company information, including those caused by "cyber attacks".

·  Dedicated Information Security & Data Protection resource/expertise within the Group.

·  Technical and procedural controls implemented to minimise the occurrence of information security and data protection breaches.

·  Access to information only provided on a "need to know" and "least privilege" basis consistent with the user's role and requires appropriate authorisation.

·  Key data loss prevention initiatives and regular system access reviews implemented across the business.

 

Information technology and infrastructure risk

The risk of loss of technology services due to loss of data, system or data centre or failure of a third party to restore services in a timely manner.

 

·  Continuous investment in increased functionality, capacity and responsiveness of systems and infrastructure, including investment in software that monitors and assists in the detection and prevention of cyber attacks.

·  Rigorous software design methodologies, project management and testing regimes to minimise implementation and operational risks.

·  Constant monitoring of systems performance and in the event of any operational issues, changes to processes are implemented to mitigate future concerns.

·  Operation of two data centres in the UK.

·  Systems and data centres designed for high availability and data integrity.

·  Continuous service available to clients in the event of individual equipment failures or major disaster recovery events.

Legal (commercial / litigation) risks

The risk that disputes deteriorate into litigation.

 

·  Compliance with legal and regulatory requirements including relevant codes of practice.

·  Early engagement with legal advisers and other risk managers.

·  Appropriately managed complaints which have a legal/litigious aspect.

·  An early assessment of the impact and implementation of changes in the law.

Operations (processing) risks

The risk that the design or execution of business processes is inadequate or fails to deliver an expected level of service and protection to client or company assets.

 

·  Investment in system development and upgrades to improve process automation.

·  Enhanced staff training and oversight in key business processing areas.

·  Monitoring and robust analysis of errors and losses and underlying causes.

Outsourcing and procurement risks

This is the risk of third party organisations inadequately or failing to provide or perform the outsourced activities or contractual obligations to the standards required by the Group.

 

·  Outsourcing only employed where there is a tactical gain in resource or experience.

·  Due diligence performed on service supplier ahead of outsourcing being agreed.

·  Service level agreements in place and regular monitoring of performance undertaken.

People risk

The risk of loss of key staff, or having insufficient skilled resources available.

·  The Board has directed that the Group maintain an active succession and resource plan for all key individuals and groups/teams, which will mitigate some of the risk of loss of key persons. It will adopt policies and strategies commensurate with its objectives of:

·      Attracting and nurturing the best staff;

·      Retaining key individuals;

·      Developing personnel capabilities;

·      Optimising continuous professional development;

·      Achieving a reputation as a good employer with an equitable remuneration policy.

Regulatory and compliance risk

 

The risk of regulatory sanction or legal proceedings as a result of failure to comply with regulatory, statutory or fiduciary requirements or as a result of a defective transaction.

·  Effective compliance function.

·  Internal audit outsourced to an independent third party professional services firm.

·  Effective compliance oversight, planning and implementation.

·  Comprehensive monitoring programmes by compliance and internal audit.

·  Controls for appointment and approval of staff holding a controlled function and annual declarations to establish ongoing fitness and propriety.

·  Governance and reporting of regulatory risks through the Risk Management Committee, Group Audit Committee and Group Risk Committee.

·  Anti-money laundering controls for client due diligence and sanctions checking.

 

 

DIRECTORS' STATEMENT PURSUANT TO THE FCA'S DISCLOSURE AND TRANSPARENCY RULES

The directors are required by the Disclosure and Transparency Rules to include a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group.

The directors of the Company, who were in office during the year, and up to the date of signing the 2017 Annual Report, were Simon Waugh, Manjit Wolstenholme, Peter Cruddas, David Fineberg, Grant Foley, Malcolm McCaig and James Richards.

Each of these directors confirms to the best of their knowledge that:

·      the Group Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

·      the Strategic Report contained in the 2017 Annual Report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face; and

·      the 2017 Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy

The Directors' statement was approved by the Board of Directors on 7 June 2017 and signed on its behalf by:

 

 

Peter Cruddas                                                                          Grant Foley

Chief Executive Officer                                                            Chief Operating and Financial Officer

 

 
Consolidated income statement

For the year ended 31 March 2017

 

£ '000

Note

Year ended

31 March 2017

Year ended

31 March 2016

Revenue

 

185,927

186,397

Interest income

 

1,739

1,762

Total revenue

3

187,666

188,159

Introducing partner commissions and betting levies

 

(26,876)

(18,812)

Net operating income

2

160,790

169,347

Other income

4

-

3,135

Operating expenses

5

(105,756)

(112,277)

EBITDA1

 

55,034

60,205

Analysed as:

 

 

 

EBITDA before exceptional items²

 

55,034

69,168

Exceptional income

4

-

3,135

Exceptional costs

5

-

(12,098)

EBITDA1

 

55,034

60,205

Depreciation and amortisation

 

(5,835)

(6,057)

Operating profit

 

49,199

54,148

Finance costs

 

(734)

(772)

Profit before taxation

 

48,465

53,376

Analysed as:

 

 

 

Profit before taxation and exceptional items

 

48,465

62,339

Exceptional income

4

-

3,135

Exceptional costs

5

-

(12,098)

Profit before taxation

 

48,465

53,376

Taxation

6

(9,309)

(10,915)

Profit for the year attributable to owners of the parent

 

39,156

42,461

 

 

 

 

Earnings per share

 

 

 

Basic earnings per share (p)

7

13.7p

15.1p

Diluted earnings per share (p)

7

13.6p

15.0p

1EBITDA represents earnings before interest, tax, depreciation and amortisation and impairment of intangible assets, but includes interest income classified as trading revenue.

²EBITDA before exceptional items represents Underlying EBITDA.

 

 

Consolidated statement of comprehensive income
For the year ended 31 March 2017

 

£ '000

 

Year ended

31 March 2017

Year ended

31 March 2016

 

Profit for the year

 

39,156

42,461

Other comprehensive income / (expense):

 

 

 

Items that may be subsequently reclassified to income statement

 

 

 

Loss on net investment hedges net of tax

 

(2,950)

(1,172)

Amounts recycled from equity to the income statement

 

159

61

Currency translation differences

 

4,255

1,563

Change in value of available-for-sale financial assets

 

(7)

4

Other comprehensive income for the year

 

1,457

456

Total comprehensive income for the year attributable to owners of the parent

 

40,613

42,917

 

 

 

Consolidated statement of financial position                       Company registration number: 05145017

At 31 March 2017

 

£ '000

Note

31 March 2017

31 March 2016

 

ASSETS

 

 

 

 

Non-current assets

 

 

 

 

Intangible assets

9

2,115

2,649

 

Property, plant and equipment

10

18,197

16,350

 

Deferred tax assets

 

8,113

7,701

 

Total non-current assets

 

28,425

26,700

 

Current assets

 

 

 

 

Trade and other receivables

11

31,542

20,931

 

Derivative financial instruments

 

1,935

795

 

Financial investments

12

20,272

20,374

 

Amounts due from brokers

 

119,390

84,230

 

Cash and cash equivalents

13

53,226

78,280

 

Total current assets

 

226,365

204,610

 

TOTAL ASSETS

 

254,790

231,310

 

LIABILITIES

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

14

36,389

34,738

 

Derivative financial instruments

 

3,340

4,996

 

Borrowings

 

5,760

1,355

 

Current tax payable

 

5,489

7,758

 

Short term provisions

 

368

160

 

Total current liabilities

 

51,346

49,007

 

Non-current liabilities

 

 

 

 

Trade and other payables

14

3,030

3,479

 

Borrowings

 

3,042

1,085

 

Deferred tax liabilities

 

24

5

 

Long term provisions

 

1,575

1,407

 

Total non-current liabilities

 

7,671

5,976

 

TOTAL LIABILITIES

 

59,017

54,983

 

EQUITY

 

 

 

 

Share capital

 

72,646

72,600

 

Share premium

 

46,236

46,243

 

Own shares held in trust

 

(466)

(984)

 

Other reserves

 

(48,056)

(49,513)

 

Retained earnings

 

125,413

107,981

 

Total equity

 

195,773

176,327

 

TOTAL EQUITY AND LIABILITIES

 

254,790

231,310

 

 

 

Consolidated statement of changes in equity

For the year ended 31 March 2017

 

£ '000

Share capital

Share premium

Own shares held in trust

Other reserves

Retained earnings

Total Equity

At 1 April 2015

70,694

33,362

(1,983)

(49,969)

90,219

142,323

New shares issued

1,906

12,881

-

-

-

14,787

Total comprehensive income for the year

-

-

-

456

42,461

42,917

Disposal of own shares held in trust

-

-

999

-

-

999

Share-based payments

-

-

-

-

205

205

Tax on share-based payments

-

-

-

-

31

31

Dividends

-

-

-

-

(24,935)

(24,935)

At 31 March 2016

72,600

46,243

(984)

(49,513)

107,981

176,327

New shares issued

46

(7)

-

-

-

39

Total comprehensive income for the year

-

-

 

1,457

39,156

40,613

Acquisition of own shares held in trust

-

-

(504)

-

-

(504)

Utilisation of own shares held in trust

-

-

1,022

-

-

1,022

Share-based payments

-

-

-

-

2,253

2,253

Tax on share-based payments

-

-

-

-

(31)

(31)

Dividends

-

-

-

-

(23,946)

(23,946)

At 31 March 2017

72,646

46,236

(466)

(48,056)

125,413

195,773

 

 

 

Consolidated statement of cash flows

For the year ended 31 March 2017

£ '000

Note

Year ended 31 March 2017

Year ended 31 March 2016

Cash flows from operating activities

 

 

 

Cash generated from operations

15

11,865

80,061

Net interest income

 

1,739

1,762

Tax paid

 

(11,372)

(6,872)

Net cash generated from operating activities

 

2,232

74,951

Cash flows from investing activities

 

 

 

Purchase of property, plant and equipment

 

(3,069)

(2,900)

Proceeds from disposal of property, plant and equipment

 

85

59

Investment in intangible assets

 

(811)

(1,092)

Proceeds from disposal of intangible assets

 

33

-

Purchase of financial investments

 

(20,562)

(20,633)

Proceeds from maturity of financial investments and coupon receipts

 

20,710

287

Outflow on Net investment hedges

 

(4,792)

-

Net cash used in investing activities

 

(8,406)

(24,279)

Cash flows from financing activities

 

 

 

Repayment of borrowings

 

(20,204)

(1,412)

Proceeds from borrowings

 

19,247

-

Proceeds from issue of ordinary shares

 

-

14,787

Disposal of own shares

 

-

999

Acquisition of own shares

 

(465)

-

Dividends paid

 

(23,946)

(24,935)

Finance costs

 

(734)

(772)

Net cash used in financing activities

 

(26,102)

(11,333)

Net (decrease) / increase in cash and cash equivalents

 

(32,276)

39,339

Cash and cash equivalents at the beginning of the year

 

78,280

38,611

Effect of foreign exchange rate changes

 

2,948

330

Cash and cash equivalents at the end of the year

 

48,952

78,280

 

1.         Basis of preparation

Basis of accounting

The financial information set out herein does not constitute the Group's statutory accounts for the years ended 31 March 2017 and 2016, but is derived from those financial statements. The Annual Report and Financial Statements for the year ended 31 March 2016 have been delivered to the Registrar of Companies and those for the year ended 31 March 2017 will be delivered following the Company's Annual General Meeting to be held on 27 July 2017. The external auditor has reported on those financial statements; its reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

While the financial information included in this announcement have been prepared in accordance with the International Financial Reporting Standards as adopted by the European Union ("IFRS"), IFRS Interpretations Committee ("IFRS IC") interpretations as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS, this announcement does not itself contain sufficient information to comply with IFRS.

The financial statements have been prepared in accordance with the going concern basis, under the historical cost convention, except in the case of "Financial instruments at fair value through profit or loss" and "Available for sale financial assets". The financial information is rounded to the nearest thousand, except where otherwise indicated.

The Group's principal accounting policies adopted in the preparation of these financial statements are consistent with those of the previous financial year. There were no new or amended standards or interpretations that resulted in a change in accounting policy. These policies have been consistently applied to all years presented. The financial statements presented are at and for the years ending 31 March 2017 and 31 March 2016. Financial annual years are referred to as 2017, and 2016 in the financial statements.

Use of estimates

The preparation of financial statements in conformity with IFRS requires the use of certain significant accounting judgements. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The only area involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the financial statements is:

Deferred taxes

The carrying amounts of deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered

 

 

2.         Segmental reporting

The Group's principal business is online retail financial services and provides its clients with the ability to trade contracts for difference (CFD) and financial spread betting on a range of underlying shares, indices, foreign currencies, commodities and treasuries. The Group also makes these services available to institutional partners through white label and introducing broker arrangements. The Group's CFDs are traded worldwide; spread betting only in UK and Ireland and the Group provides stockbroking services only in Australia. The Group's core business is generally managed on a geographical basis and for management purposes, the Group is organised into three segments:

·      UK and Ireland (UK & IE);

·      Europe;

·      Australia, New Zealand and Singapore (APAC) and Canada;

Revenues and costs are allocated to the segments that originated the transaction. Costs generated centrally are allocated to segments on an equitable basis, mainly based on revenue, headcount or active client levels.

Year ended 31 March 2017

£ '000

UK & IE

Europe

APAC & Canada

Central

Total

Segment revenue net of introducing partner commissions and betting levies

61,091

45,194

52,766

-

159,051

Interest income

192

-

1,547

-

1,739

Net operating income

61,283

45,194

54,313

-

160,790

Other income

-

-

-

-

-

Segment operating expenses

(12,689)

(11,679)

(12,582)

(68,806)

(105,756)

Segment EBITDA

48,594

33,515

41,731

(68,806)

55,034

Allocation of central operating expenses

(21,844)

(21,865)

(25,097)

68,806

-

Depreciation and amortisation

(914)

(237)

(635)

(4,049)

(5,835)

Allocation of central depreciation and amortisation

(1,206)

(1,490)

(1,353)

4,049

-

Operating profit

24,630

9,923

14,646

-

49,199

Finance costs

(71)

(4)

(2)

(657)

(734)

Allocation of central finance costs

(271)

(202)

(184)

657

-

Profit before taxation

24,288

9,717

14,460

-

48,465

 

 

 

 

                               

Year ended 31 March 2016

£ '000

UK & IE

Europe

APAC & Canada

Central

Total

Segment revenue net of net of introducing partner commissions and betting levies

63,153

48,483

55,949

-

167,585

Interest income

286

-

1,476

-

1,762

Net operating income

63,439

48,483

57,425

-

169,347

Other income

3,135

-

-

-

3,135

Segment operating expenses

(12,879)

(11,424)

(10,117)

(77,857)

(112,277)

Segment EBITDA

53,695

37,059

47,308

(77,857)

60,205

Allocation of central operating expenses

(26,430)

(26,727)

(24,700)

77,857

-

Depreciation and amortisation

(953)

(164)

(297)

(4,643)

(6,057)

Allocation of central depreciation and amortisation

(1,309)

(1,625)

(1,709)

4,643

-

Operating profit

25,003

8,543

20,602

-

54,148

Finance costs

(44)

-

-

(728)

(772)

Allocation of central finance costs

(268)

(231)

(229)

728

-

Profit before taxation

24,691

8,312

20,373

-

53,376

The measurement of net operating income for segmental analysis is consistent with that in the income statement.

The Group uses 'EBITDA' to assess the financial performance of each segment. EBITDA comprises operating profit for the year before interest expense, taxation, depreciation of property, plant and equipment and amortisation and impairment of intangibles.

3.         Total revenue

Revenue

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

CFD and spread bet

175,842

179,345

Stockbroking

10,104

6,826

Other

(19)

226

Total

185,927

186,397

Interest income

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Bank and broker interest

1,622

1,587

Interest from clients

64

151

Interest on financial investments

53

24

Total

1,739

1,762

The Group earns interest income from its own corporate funds and from segregated client funds.

4.         Other income

Exceptional income

As a result of their materiality the directors decided to disclose certain amounts separately in order to present results which are not distorted by significant non-recurring events

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Litigation settlement

-

3,135

Total

-

3,135

In October 2015 the Group settled a dispute with a number of its former clients. The total settlement amount was £3,135,000 due to be paid to the Group over a two year period to 30 September 2017. This was treated as exceptional income during the year ended 31 March 2016. As at 31 March 2017 £2,515,000 (31 March 2016: £2,025,000) had been received.

5.         Operating expenses

 

£ '000

Year ended

31 March 2016

Staff costs

49,380

46,113

IT costs

15,352

12,698

Sales and marketing

21,791

18,298

Premises

5,211

4,795

Legal and Professional fees

3,520

3,111

Regulatory fees

2,550

3,192

Other

7,952

11,972

Operating expenses before exceptional costs

105,756

100,179

Exceptional Costs

-

12,098

Operating expenses

105,756

112,277

The above presentation reflects the breakdown of Operating expenses by nature of expense.

Exceptional Costs

As a result of their materiality the directors decided to disclose certain amounts separately in order to present results which are not distorted by significant non-recurring events

 

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Listing costs

-

5,884

Share based payments (including social security) to directors and employees

-

6,214

Exceptional costs

-

12,098

On 5 February 2016 the Company's ordinary shares were listed on the London Stock Exchange. Total listing costs during the year ended 31 March 2016 amounted to £6,418,000. In the year ended 31 March 2016 a total of £534,000 of these costs were recognised directly in equity as they are costs that relate to the issue of new shares, £5,884,000 were recognised as exceptional costs.

In the year ended 31 March 2016, share based payments (including social security) to directors and employees related to the listing event triggered both the settlement of existing share option schemes and the award of new shares to certain directors and employees amounting to £6,214,000. The social security element amounts to £787,000.

 

 

6.         Taxation

 

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Analysis of charge for the year:

 

 

Current tax

 

 

Current tax on profit for the year

9,034

10,769

Adjustments in respect of previous years

(41)

354

Total current tax

8,993

11,123

Deferred tax

 

 

Origination and reversal of temporary differences

414

77

Adjustments in respect of previous years

(187)

(436)

Impact of change in tax rate

89

151

Total deferred tax

316

(208)

Total tax

9,309

10,915

The standard rate of UK corporation tax charged was 20% with effect from 1 April 2015.Taxation outside the UK is calculated at the rates prevailing in the respective jurisdictions. The effective tax rate of 19.21% (Year ended 31 March 2016: 20.45%) differs from the standard rate of UK corporation tax rate of 20% (Year ended 31 March 2016: 20%). The differences are explained below:

 

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Profit before taxation

48,465

53,376

Profit multiplied by the standard rate of corp. tax in the UK of 20% (31 March 2016: 20%)

9,693

10,675

Adjustment in respect of foreign tax rates

465

469

Adjustments in respect of previous years

(228)

(82)

Impact of change in tax rate

89

151

Effect of research and development tax credits

-

(41)

Expenses not deductible for tax purposes

366

1,440

Income not subject to tax

(115)

(47)

Irrecoverable foreign tax

292

214

Recognition of previously unrecognised tax losses

(1,380)

(1,816)

Other differences

127

(48)

Tax tax

9,309

10,915

For the year ended 31 March 2017, the tax effect of exceptional costs that were not recognised for tax purposes was £nil (Year ended 31 March 2016: £1,177,000)

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Tax on items recognised directly in Equity

 

 

Tax (credit) / charge on Share based payments

(31)

31

7.         Earnings per share (EPS)

Basic EPS is calculated by dividing the earnings attributable to the equity owners of the Company by the weighted average number of ordinary shares in issue during each year excluding those held in employee share trusts which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding those held in employee share trusts, is adjusted to assume conversion of all dilutive potential weighted average ordinary shares, which consists of share options granted to employees during the year ended 31 March 2017.

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Earnings attributable to ordinary shareholders (£ '000)

39,156

42,461

Weighted average number of shares used in the calculation of basic earnings per share ('000)

286,693

281,189

Dilutive effect of share options ('000)

2,072

1,206

Weighted average number of shares used in the calculation of diluted earnings per share ('000)

288,765

282,395

 

 

 

Basic earnings per share (p)

13.7p

15.1p

Diluted earnings per share (p)

13.6p

15.0p

For the year ended 31 March 2017, 2,072,000 (Year ended 31 March 2016: 1,206,000) potentially dilutive weighted average ordinary shares in respect of share options in issue were included in the calculation of diluted EPS.

8.         Dividends

£ '000

Year ended

31 March 2017

Year ended

31 March 2016

Declared and paid in each year

 

 

Final dividend for 2016 at 5.36p per share (2015: 3.57p)

15,392

9,968

Interim dividend for 2017 at 2.98p per share (2016: 3.57p)

8,554

9,978

Special dividend for 2017 at Nil p per share (2016:1.79p)

-

4,989

Total

23,946

24,935

The final dividend for 2017 of 5.95p per share, amounting to £17,141,000 was proposed by the board on 7 June 2017 and has not been included as a liability at 31 March 2017. The dividend will be paid on 25 August 2017, following approval at the Company's AGM, to those members on the register at the close of business on 4 August 2017.

The dividends paid or declared in relation to the financial year are set out below:

pence

Year ended

31 March 2017

Year ended

31 March 2016

Declared per share

 

 

Interim dividend

2.98p

3.57p

Final dividend

5.95p

5.36p

Ordinary dividend

8.93p

8.93p

Special dividend

-

1.79p

Total dividend

8.93p

10.72p

9.         Intangible assets

During the year ended 31 March 2017, additions to intangible assets amounted to £811,000 (Year ended 31 March 2016: £1,092,000). As at 31 March 2017, the net book value of intangible assets was £2,115,000 (31 March 2016: £2,649,000).

10.        Property, plant and equipment

During the year ended 31 March 2017, additions to property, plant and equipment amounted to £6,114,000 (Year ended 31 March 2016: £2,900,000). As at 31 March 2017, the net book value of property, plant and equipment was £18,197,000 (31 March 2016: £16,350,000).

11.        Trade and other receivables

£ '000

31 March 2017

31 March 2016

Gross trade receivables

5,089

4,466

Less: provision for impairment of trade receivables

(3,491)

(3,990)

Trade receivables

1,598

476

Prepayments and accrued income

7,494

7,697

Stock broking debtors

19,292

7,151

Other debtors

3,158

5,607

Total

31,542

20,931

Stock broking debtors represent the amount receivable in respect of equity security transactions executed on behalf of clients with a corresponding balance included within trade and other payables (note 14).

12.        Financial investments

£ '000

31 March 2017

31 March 2016

UK Government securities:

 

 

At 1 April

20,374

-

Purchase of securities

20,562

20,633

Maturity of securities and coupon receipts

(20,710)

(287)

Accrued interest

53

24

Net (losses) / gains transferred to equity

(7)

4

At 31 March

20,272

20,374

13.        Cash and cash equivalents

£ '000

31 March 2017

31 March 2016

Gross cash and cash equivalents

363,258

304,364

Less: Client monies

(310,032)

(226,084)

Own cash and cash equivalents

53,226

78,280

Analysed as:

 

 

Cash at bank

50,218

75,577

Short-term deposits

3,008

2,703

Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments, with maturities of three months or less. Cash at bank earns interest at floating rates, based on daily bank deposit rates.

Cash and cash equivalents comprise of the following for the purpose of the statement of cash flows:

£ '000

31 March 2017

31 March 2016

Cash and cash equivalents

53,226

78,280

Less: Bank overdrafts

(4,274)

-

Cash and cash equivalents

48,952

78,280

 

14.     Trade and other payables

£ '000

31 March 2017

31 March 2016

Current

 

 

Gross trade payables

313,871

228,329

Less: Client monies

(310,032)

(226,084)

Trade payables

3,839

2,245

Tax and social security

25

1,035

Stock broking creditors

17,079

9,186

Accruals and deferred income

15,446

22,272

 

36,389

34,738

Non-current

 

 

Accruals and deferred income

3,030

3,479

Total

39,419

38,217

15.        Cash generated from operations

 £ '000

Year ended

31 March 2017

Year ended

31 March 2016

Cash flows from operating activities

 

 

Profit before taxation

48,465

53,376

Adjustments for:

 

 

Net interest income

(1,739)

(1,762)

Finance costs

734

772

Depreciation

4,498

3,951

Amortisation of intangible assets

1,337

2,106

Other non-cash movements including exchange rate movements

719

-

Share-based payment

3,107

205

Changes in working capital:

 

 

(Increase) / decrease in trade and other receivables

(10,664)

(2,189)

(Increase) / Decrease in amounts due from brokers

(35,160)

25,564

Decrease / (Increase) in trade and other payables

1,180

(4,432)

(Increase) / Decrease in net derivative financial instruments

(954)

6,671

Increase / (Decrease) in provisions

342

(4,201)

Cash generated from operations

11,865

80,061

The movement in trade and other payables for the year ended 31 March 2016 also includes £2,230,000 of exceptional listing related accrued expenses.

The movement in trade and other receivables for the year ended 31 March 2017 also includes £490,000 (31 March 2016: £1,110,000) of exceptional litigation income received during the year.

 

 

 

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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