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(Alliance News) - STM Group PLC issued a profit warning on Wednesday due to troubles with integration of Carey Group and a weak UK pension sector.
Shares in the cross border financial services provider were down 27% at 31.82 pence in London in morning trade.
Revenue for 2019 is now forecast to be around GBP23.0 million, with pretax profit expected at around GBP3.8 million and underlying pretax profit forecast at about GBP2.5 million. The underling figure excludes non-recurring costs and exceptional items such as bargain purchase gains.
This would represent a 7.5% rise in revenue from 2018's figure of GBP21.4 million. However, the estimated pretax profit would be a 5.0% drop from GBP4.0 million, while underlying pretax profit would be 32% lower than the GBP3.7 million reported for 2018.
In the firm's half year report in September, STM Chief Executive Alan Kentish said he was expecting top line growth and a rise in profit for 2019.
While revenue is still expected to be higher, profit is not. A major cause of this is the acquisition of Carey in February, with rebranding taking longer than expected and leading to product re-launch delays. On top of this, the application of the Carey Master trust to the UK pensions regulator took longer than expected and caused delays as well, resulting in higher one-off professional costs.
STM also faced difficulties stemming from "uncertainties and concerns" within the UK pension sector, with lower than expected levels of new applications in the Pensions division. The pipeline of new business following STM's re-launch of UK flexible annuity in June 2019 is growing, but not as quickly as expected and the firm's non-core Companies & Trust Services business also bought in less revenue than originally forecast.
Looking ahead, STM intends to undertake "a number of specific IT projects" all aimed at improving operating margins. However, these will incur costs in 2020. In addition, costs from its Professional Indemnity insurance are likely to rise by more than GBP500,000 annually starting in late 2019.
The damage caused by slower new project revenue is likely to continue into 2020, though STM retains confidence in its strategy.
Kentish said: "The last six months have been incredibly frustrating, the headwinds on completing certain initiatives such as the Carey rebranding and our flexible annuity rollout have slowed down our new business pipeline."
He added: "There has been a seismic change in the Professional Indemnity insurance market capacity resulting in disproportionate increases in premiums. Certainly, this is likely to remain the case for the next couple of years until the insurance cycle moves on. Ironically, opportunities will arise for acquisitions as some firms will look to exit the market as a result of these increases.
"Whilst it is disappointing to start on a rebased 2020 [pretax profit], I feel confident that we have the right tools in place and growth opportunities available to us to deliver enhanced underlying profitability. I look forward to updating the market as to our successes on these various matters as we progress into 2020."
By Anna Farley; annafarley@alliancenews.com
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