Brooks Macdonald Regulatory News (BRK)

12 March 2020

BROOKS MACDONALD GROUP PLC

HALF-YEAR RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2019

"Disciplined execution of our strategy driving increased underlying profit margin and positioning the business for further success"

Brooks Macdonald Group plc ("Brooks Macdonald" or the "Group") today announces its half-year results for the six months ended 31 December 2019.

Strong financial performance

· Revenues up by 8.1% compared to H1 FY19 to £55.8 million driven by higher average Funds under Management ("FUM").

· Underlying profit before tax up 28.6% to £11.7 million with a profit margin of 21.0% (H1 FY19: 17.6%), with improved underlying profit margin in all three divisions of UK Investment Management ("UKIM"), International, and Financial Planning ("FP").

· Statutory profit before tax from continuing operations increased to £7.9 million (H1 FY19: £0.6 million), driven by the improved underlying performance and fewer adjustments in the period.

· Underlying diluted earnings per share rose by 30.1% to 68.7p (H1 FY19: 52.8p).

· Interim dividend up by 10.5% to 21.0p (H1 FY19: 19.0p) in line with the Group's progressive dividend policy.

· Total FUM of £13.1 billion (30 June 2019: £13.1 billion, 31 December 2018: £11.7 billion) representing an increase of 12.0% on the prior year and a decrease of 0.4% in the six months to 31 December 2019.

Disciplined strategic execution

· Strategy announced in 2017 remains on track, midway through second phase of increasing value by enhancing what we do and how we do it, positioning the business for further success.

· Announced the acquisition of Cornelian Asset Managers Group Limited ("Cornelian") (completed following the period end), strengthening our core offering, building scale and bringing in new talent, with a business meeting our stated acquisition criteria - high-quality, earnings accretive, and a good strategic and cultural fit.

· Continued focus on delivering for clients and advisers with a relaunched Managed Portfolio Service ("MPS") on platforms and within our Bespoke Portfolio Service ("BPS"), the Court of Protection, Decumulation and Responsible Investment Service propositions gaining traction.

· Inflows stable or up compared to H1 FY19 in all product groups except MPS on platform (leading to relaunch late in H1) and Third Party funds (affected by the previously announced exit of low margin business).

· Continued robust investment performance of 3.4% in the period, compared to an increase of 2.9% in the MSCI WMA Private Investor Balanced Index.

· Reinvigoration of International continued, focusing the business on clients, advisers and fiduciaries.

· Further investment in talent, developing and promoting internally as well as hiring to bring new skills and capabilities, supporting the Group's growth ambitions.

· Driving efficiency and effectiveness and making Brooks Macdonald easier to do business with, including the launch and roll-out of our new client portal, myBM.

Caroline Connellan, CEO, commented:

"I am delighted with the progress made during the first half. We continued to execute our strategy with discipline, making good progress on our commitment to improve underlying profit margins, in a strong first half financial performance, and welcomed Cornelian to the Brooks Macdonald group. We remain confident in the actions we are taking to set the business up for continued success, provide outstanding products and services for clients and advisers, and deliver value for shareholders.

"We saw improvement in client sentiment at the start of the calendar year and we continue to have a positive outlook over the medium term. In the short term, the macroeconomic outlook remains uncertain, exacerbated by the increasing impact of the coronavirus outbreak, with highly volatile markets and the potential effect on the wider economy. Given our focus on delivering for clients and advisers, our investment in talent, and our enhanced execution discipline, we are confident we are building the high-performance culture that will deliver our growth ambitions."

1The underlying figures represent the results for the Group's continuing activities excluding underlying adjustments as listed in the Interim Management Report. The Board considers the underlying profit to be a more appropriate reflection of the Group's performance compared to statutory profit. A reconciliation between the Group's statutory and underlying profit before tax is also included in the Interim Management Report.

2Statutory results represent results from continuing operations. Details of the discontinued operations are given in Note 7.

An analyst meeting will be held at 9.15 for 9.30am on Thursday, 12 March at the offices of Brooks Macdonald Group at 21 Lombard Street, London, EC3V 9AH. A conference call facility will be provided for those who choose not to attend in person; the dial-in number is +44 (0)330 336 9105 and the participant code is 8586935.Please contact Ailsa Prestige at MHP on 020 3128 8147 or e-mail brooks@mhpc.com for further details.

LEI: 213800WRDF8LB8MIEX37

Enquiries to:

Notes to editors

Brooks Macdonald Group plc, through its various subsidiaries, provides leading investment management services in the UK and internationally. The Group, which was founded in 1991 and began trading on AIM in 2005, had Discretionary Funds under Management of £13.1 billion as at 31 December 2019.

Brooks Macdonald offers a range of investment management services to private high net worth individuals, pension funds, institutions, charities and trusts. The Group also provides financial planning as well as offshore investment management and acts as fund manager to a regulated OEIC providing a range of risk-managed multi-asset funds and a specialised absolute return fund.

The Group has twelve offices across the UK and the Channel Islands including London, East Anglia, Hampshire, Leamington Spa, Leeds, Manchester, Taunton, Tunbridge Wells, Scotland, Wales, Jersey and Guernsey.

Interim management report

A positive half year

It has been a good six months for Brooks Macdonald with an ongoing focus on executing our strategy and positioning the business to take advantage of growth opportunities.

The Group delivered strong financial performance with material progress in our medium-term commitment to increase profit margins, alongside growth in revenues and increased earnings per share, all achieved despite a backdrop of macroeconomic and political uncertainty giving rise to relatively weak client sentiment.

As we continued to implement our strategy, we kept our clients and advisers at the forefront, working to improve their experience and making Brooks Macdonald easier to do business with. We launched and continue to roll out our new online client and adviser portal, myBM.

Our investment in talent continued across the Group, with a number of appointments to our senior leadership, and Robin Eggar recently taking sole responsibility as Managing Director, UK Investment Management ("UKIM"). We remain focused on developing and promoting our talent, as well as hiring the right people to complement our capabilities and support the future growth and success of our business.

We delivered improvements in our efficiency and effectiveness across the business, streamlining processes and eliminating duplication and continuing to invest in our risk management and governance framework. Our Centralised Investment Process achieved robust risk adjusted returns for clients in the period and is ahead of the relevant ARC benchmarks across all risk profiles over three and five years.

On 22 November 2019, we announced the acquisition of Cornelian, a well-established wealth manager with a track record of profitable growth. The transaction completed successfully on 28 February 2020. Integration planning proceeded well while we awaited final regulatory approval and we are now working to integrate Cornelian into the Group.

Strong financial performance

The Group delivered a marked further improvement in performance during the first half of the financial year. We continued to deliver progress on our stated medium-term target of increasing margins, with underlying profit margin rising to 21.0% (H1 FY19: 17.6%).

Revenues were up 8.1% to £55.8 million (H1 FY19: £51.6 million) whereas underlying costs increased by just 3.8% to £44.1 million as we continued to enforce strong cost discipline. This resulted in an underlying profit before tax of £11.7 million, a 28.6% increase on the prior period (H1 FY19: £9.1 million) and an increase of 30.1% in underlying diluted EPS to 68.7p (H1 FY19: 52.8p).

Our statutory profits also increased significantly on the prior period from £0.6 million to £7.9 million driven by improvements in underlying performance and fewer adjustments. Accordingly, the statutory earnings per share on a diluted basis moved from a loss of 6.3 pence in the previous period to earnings of 45.1 pence this half.

We maintained Group FUM over the period at £13.1 billion. This included growth of 1.3% in UKIM discretionary FUM (comprising BPS and MPS) and 1.8% in International, offset by a 13.6% reduction in UKIM Funds, driven in particular by the loss of a low margin £244 million mandate for Grosvenor Consulting (as previously reported).

In keeping with our stated progressive dividend policy and the improved results for the period, the Group is declaring an interim dividend of 21.0 pence per share, a 10.5% uplift on the interim dividend paid last year. The interim dividend will be paid on 24 April 2020 to shareholders on the register as at 27 March 2020.

Disciplined strategic execution

The Group's purpose is to protect and enhance our clients' wealth through the provision of investment management and advice alongside exceptional service. Our strategy continues to be based on the three pillars of foundation, focus and growth, as initially laid out in 2017:

· Building on a foundation of success, with our client-centric culture and our strong relationships with clients and advisers driving growth in funds under management.

· Focusing to deliver value to our shareholders, our clients and advisers, and our staff, working from a sustainable platform to ensure that we deliver improved margins in the medium term.

· Driving for growth, deepening our relationships with our existing clients and advisers and bringing our investment management and financial planning expertise to new clients.

Having completed a first phase of reinforcing the foundations of the business and taking immediate actions to improve margins, we are now in the second phase, increasing value by enhancing what we do and how we do it.

During the six months to 31 December 2019, we made our first inorganic move since 2014 to complement our organic growth strategy, announcing the acquisition of Cornelian. Cornelian fits our stated acquisition criteria of a high quality, earnings accretive business with a good strategic and cultural fit, and will add c. £1.4 billion in FUM. The acquisition augments the Group's existing direct client and multi-asset funds offerings as well as strengthening our intermediary distribution reach.

Improvements across the Group

During the period, we made good progress across all our businesses with higher underlying profit margins in UK Investment Management, International and Financial Planning.

Our Centralised Investment Proposition has continued to perform well, giving returns ahead of the relevant ARC Private Client Index across all risk profiles for three and five years; continued good performance is critical to medium-term client retention.

Strengthening in UKIM

Over the course of the first half of the financial year we implemented strategic and operational improvement initiatives within UK Investment Management, the largest part of our business. We recently appointed Robin Eggar as Managing Director, UK Investment Management, taking sole responsibility for UKIM. We strengthened our investment team leadership both in London and across the regions, building to a team of four London Team Heads and four Regional Heads. We also promoted internally to a new position of Director, Head of UK Distribution. We were successful in hiring new talent at all levels in our investment management and distribution teams, bringing in complementary skills and expertise, and in giving opportunities to the talent we already have in the business through internal promotions. Investing in our talent, whether promoting or hiring, will support the high-performance culture that is critical to our growth ambitions, and will remain an area of focus.

The decisive actions we announced in January 2019 to streamline and simplify the business, driving efficiency and effectiveness, involved a net headcount reduction of c.50, predominantly in administration and IT areas. This included some client-facing staff which, along with modest additional departures over the course of the year, has led to some associated client attrition and limited FUM outflows. Nonetheless, we are confident that the moves we are making are enhancing our capabilities, building an organisation that will deliver our growth agenda.

Inflows were stable or up compared to H1 FY19 in all product groups except MPS on platform (leading to its relaunch late in H1) and Third Party funds (affected by the previously announced exit of low margin business).

Within the BPS umbrella, our Decumulation and Responsible Investment Services, launched in FY19, have been well received and are starting to build traction. Our relaunched Court of Protection service has also been performing well, recording gross inflows in excess of £50 million during the period.

We relaunched our MPS platform service to provide advisers and clients with the benefits of our rigorous Centralised Investment Proposition in a value-driven format with a reduced pricing structure. We are expanding the range of platforms on which it is available.

Success in DCF, loss of low margin business elsewhere in Funds

Within Funds, our Defensive Capital Fund ("DCF") has been an ongoing success story, reaching the £700 million FUM milestone in the period when Niall O'Connor took over the Fund following Jon Gumpel stepping down. 

However, during the second quarter, the Group's investment management agreement for the Grosvenor Consulting funds was terminated, as previously announced. This accounted for £244 million of FUM corresponding to annualised revenues of circa £0.6 million. This followed extensive discussions between Brooks Macdonald and Grosvenor over the purchase of the sponsorship company attached to the Grosvenor funds, where we were unable to reach a satisfactory commercial arrangement that met our stated acquisition criteria.

Reinvigoration of International

Our International business delivered encouraging progress with the leadership of Andrew Shepherd continuing to reinvigorate the business, focusing on delivering for clients, advisers and trustees. The team is working to focus the business on its core opportunities and to make the organisation more efficient, which is starting to drive improved profitability. Although revenues were slightly down on the prior period, asset outflows are now at much reduced levels compared to the first half of last year. We see potential for material value creation in International as the reinvigoration continues.

Financial Planning improved performance

The Financial Planning division has completed its operational review and has commenced implementation of the findings. It continues to improve productivity and making good progress in transitioning clients to a fee-based pricing structure. Although the division remained loss-making in the period, it narrowed the gap to break-even and we are optimistic that further benefits will be seen from these changes over the upcoming two years.

Spearpoint legacy matters

During the period, we continued to make progress in dealing proactively with the previously announced legacy matters arising from the former Spearpoint business which we acquired in 2012. These matters relate both to a number of discretionary portfolios formerly managed by Spearpoint, now managed by our Jersey office, and to a Dublin-based fund, for which Spearpoint acted as investment manager. While we accept no legal liability in these matters, we have a deep commitment to treating customers fairly and seeking to protect our clients' best interests.

In H2 FY19, the Board of the Dublin-based fund agreed our goodwill offer of £3.4 million and received unanimous shareholder approval at an Extraordinary General Meeting in April 2019. Shareholders had until 4 September 2019 to claim their share, and the company is now going into voluntary liquidation with only final clearance from the Irish Revenue outstanding. As we reported with our FY19 annual results, 84% of the discretionary clients to whom we issued a goodwill offer in March 2018 accepted that offer. To date, we have received no claims.

As at 30 June 2019, £11.3 million of the total £12.0 million provision had been utilised, leaving £0.7 million outstanding. Over the 6 months to 31 December 2019, a negligible amount was utilised, leaving the balance at £0.7 million. The total expensed provision remains unchanged and we intend to deal with any residual issues in the ordinary course of business.

We continue to be in discussions with all stakeholders, including relevant regulators, as we seek to bring these matters to a conclusion.

Positive medium-term outlook, short-term uncertainty

With continued investment in talent, we have highly skilled and experienced teams across the business, positioning us well to build on our success to date and achieve our growth ambitions. We continue to focus on serving our clients and strengthening our relationships with advisers by further enhancing our offering, simplifying the business and making Brooks Macdonald easier to work with.

The developing momentum in our underlying business, combined with the acquisition of Cornelian, represented a significant step forward in our strategy of delivering sustainable, value-enhancing growth.

We saw improvement in client sentiment at the start of the calendar year and we continue to have a positive outlook over the medium term. In the short term, the macroeconomic outlook remains uncertain, exacerbated by the increasing impact of the coronavirus outbreak, with highly volatile markets and the potential effect on the wider economy. Given our focus on delivering for clients and advisers, our investment in talent, and our enhanced execution discipline, we are confident we are building the high-performance culture that will deliver our growth ambitions.

The table below shows the Group's financial performance for the six months ended 31 December 2019 with comparative periods and provides a reconciliation between the underlying results, which the Board considers to be a more appropriate reflection of the Group's performance and the statutory results.

Group financial results summary

1 Comparative results have been restated to exclude discontinued operations in respect of the Ground Rents Income Fund plc ("GRIF") in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the discontinued operations.

During the first six months of the financial year, the Group reported an 8.1% increase in total revenues from £51.6 million to £55.8 million. Fee income was up 7.7% to £44.7 million (H1 FY19: £41.5 million) driven by higher average FUM levels in the period and the continued trend towards higher quality fee-only rates. Non-fee income has also increased on the prior period totalling £11.1 million (H1 FY19: £10.1 million).

Underlying costs increased marginally by 3.8% to £44.1 million on the prior period. Fixed staff costs fell by 2.6% from £19.7 million in H1 FY19 to £19.2 million this period, reflecting the benefits arising from the costs reduction exercise carried out in FY19 and partially offset by the continued investment in and development of our talent resources. Variable staff costs increased by 7.1% to £7.5 million.

Non-staff costs increased by 10.1% from £15.8 million to £17.4 million. The main contributors to this increase include higher property-related costs (£0.6m) as a result of higher lease charges due to the transition to IFRS 16 from 1 July 2019, accelerated dilapidation costs, increased business rates and lease termination costs. IT spend has increased (£0.4 million) arising from the launch of our new online client portal, myBM, entering into new Data Centre arrangements and investing in cyber security risks mitigation. Regulatory and compliance costs are also up in the period (£0.7 million) principally driven by a supplementary FSCS levy communicated in FY20 in respect of FY19 of £0.2 million (H1 FY19 £0.1 million credit), along with higher internal audit and professional indemnity insurance. In addition, we expect the FSCS levy for FY20, which is recognised within the second half, to be significantly higher than that charged in respect of FY19.

Underlying profits for the first half amounted to £11.7 million, a 28.6% increase on the prior period resulting in a profit margin of 21.0% (H1 FY19: 17.6%) delivering on our stated target of marginal progression in margin.

Statutory profits before tax from continuing operations have increased significantly on the prior period from £0.6 million to £7.9 million giving rise to a statutory profit margin of 14.2%. This was in part driven by fewer underlying adjustments in the period with the total impact decreasing from £8.5 million in H1 FY19 to £3.8 million this period.

Funds under management ("FUM")

1 Comparative periods FUM have been restated to exclude the funds held in GRIF to present a more appropriate year-on-year comparison.

Total FUM at 31 December 2019 stood at £13.1 billion (H1 FY19: £11.7 billion, FY19: £13.1 billion), representing an increase of 12.0% on the FUM levels at H1 FY19 and a modest decline of 0.4% on the closing position for FY19. Net outflows in the period of £0.5 billion were partly driven by softer client sentiment in the light of the political and macroeconomic backdrop, the Group's focus on efficiency and business quality and the termination of the investment management agreement for the Grosvenor Wealth Management funds as previously announced. Investment performance continued to be robust of 3.4% in the period, compared to an increase of 2.9% in the MSCI WMA Private Investor Balanced Index.

Closing FUM by service and segment

The table below shows the closing FUM broken down by segment and by our key services within UKIM at 31 December 2019 and comparative periods.

1 Comparative periods FUM have been restated to exclude the funds held in GRIF to present a more appropriate year-on-year comparison.

Average FUM by service and segment

The table below shows the average FUM2 broken down by segment and by our key services within UKIM at 31 December 2019 and comparative periods.

1 Comparative periods FUM have been restated to exclude the funds held in GRIF to present a more appropriate year-on-year comparison.

2 Average FUM calculated using actual FUM on billing dates in each period.

As noted from the above table, average FUM has increased across all categories compared to prior periods.

Segmental analysis

The Group reports its results across three key operating segments; UK Investment Management, International and Financial Planning. The tables below provide a breakdown of the half year performance broken down by these segments, with comparatives.

1 Comparative results have been restated to exclude discontinued operations in respect of GRIF in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the discontinued operations.

All three business segments reported an improvement in performance during the first half compared to the previous period. UK Investment Management and Financial Planning recognised an increase in revenues during the period, up by 10.4% and 11.1% respectively. International reported a slight decline in revenues of 5.4% driven by the realignment of the business over the last year.

In line with our stated objective of reducing the cost growth trajectory, the costs incurred by the three business segments have increased proportionately lower than the rise in revenues, particularly within International, which had strong delivery against its strategic plan with cost actions driving profitability improvements. UK Investment Management continued to perform well, with flat direct costs delivering good profit growth.

Whilst Financial Planning is still in its turnaround phase, revenues were up and costs stable as it executed the findings of its operational review, delivering a higher contribution to the Group and a reduction in the underlying loss compared to the prior period. The above factors contributed to an improvement in underlying profitability across all businesses and an encouraging progression in profit margin.

Reconciliation between underlying and statutory profits

Underlying profit before tax is considered by the Board to be a more accurate reflection of the Group's performance when compared to the statutory results as this excludes income and expense categories which are deemed of a non-recurring nature or a non-cash operating item. Reporting at an underlying basis is also considered more appropriate for external analyst coverage and peer group benchmarking allowing a more accurate like-for-like comparison. A reconciliation between underlying and statutory profit before tax for the six months ended 31 December 2019 with comparatives is shown in the table below:

1 Comparative results have been restated to exclude discontinued operations in respect of GRIF in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the discontinued operations.

Acquisition costs (£2.0 million charge)

These represent costs incurred in relation to the acquisition of Cornelian during the six months ended 31 December 2019. The costs incurred include corporate finance services, legal fees and due diligence fees. These costs are being excluded from the Group's underlying performance as they were not incurred as part of the normal trading activity.

Amortisation of client relationships and contracts acquired with fund mangers (£1.1 million charge)

These intangible assets are created in the course of acquiring funds under management and are amortised over their useful life, which has been assessed to range between 5 and 20 years. The amortisation charge has been excluded from the underlying profit since it is a significant non-cash item. Refer to Note 10 for more details.

Head office relocation costs (£0.6 million charge)

The Group's London offices based in Welbeck Street and Bevis Marks have been relocated to a single site at 21 Lombard Street in the City of London. As a result of the move, dual running costs are being incurred on the three locations until the existing office leases at Bevis Marks and Welbeck Street expire in March 2020. The dual running costs and other costs associated with the move have been excluded from underlying profit in view of their one-off nature.

Changes in fair value of consideration and related disposals (£0.1 million charge)

This comprises the fair value measurement arising on deferred payments and receipts from previous acquisitions and disposals carried out by the Group, together with their associated net finance costs and costs of disposal where applicable.

Taxation

The Group's corporation tax charge on underlying profits for the period was £1.5 million (H1 FY19: £1.5 million) representing an effective tax rate of 17.3% (H1 FY19: 20.1%). The decrease in the effective tax rate is largely due to goodwill and client relationship contract impairments recognised in the prior period which are not allowable for tax purposes. The effective tax charge for the current period includes the increased deferred tax credit on share options and includes certain costs incurred in respect of the Cornelian acquisition which are not allowable for tax purposes. Refer to Note 6 for more details.

Earnings per share

The Group's basic statutory earnings per share for the six months ended 31 December 2019 was 45.2 pence (H1 FY19: 5.9 pence loss). On an underlying basis, basic earnings per share increased by 30.3% to 68.8 pence (H1 FY19: 52.8 pence). Details on the basic and diluted earnings per share are provided in Note 8.

Dividend

In line with the Group's progressive dividend policy, the Board has declared an interim dividend of 21.0 pence (H1 FY19: 19.0 pence). This represents an increase of 10.5% compared to the previous period. The interim dividend will be paid on 24 April 2020 to shareholders on the register as at 27 March 2020. Refer to Note 9 for more details.

Financial position and regulatory capital

The Group's financial position remains strong with net assets increasing to £119.8 million (FY19: £87.6 million) largely as a result of the equity placing carried out in November 2019. Refer to Note 18 for more details on the equity placing.

Brooks Macdonald Asset Management Limited, the Group's main operating subsidiary, is an IFPRU 125k Limited Licence Firm regulated by the Financial Conduct Authority ("FCA"). In view of this, the Group is classified as a regulated group and subject to the same regime. The Group monitors a range of capital and liquidity statistics on a daily and monthly basis.

As at 31 December 2019, the Group had regulatory capital resources of £67.1 million (FY19: £32.9 million), representing a capital adequacy ratio of 389% (FY19: 239%) over the Pillar I requirement. The capital resources at 31 December 2019 include the impact of the equity placing made in November 2019 to fund the acquisition of Cornelian.

As required under FCA rules, and those of both the Jersey and Guernsey Financial Services Commission, the Group assesses its regulatory capital and liquidity on an ongoing basis through the Internal Capital Adequacy Assessment Process ("ICAAP") and Adjusted Net Liquid Asset ("ANLA") assessments, which include performing a range of stress tests and scenario analysis to determine the appropriate level of regulatory capital and liquidity that the Group needs to hold. Surplus levels of capital and liquidity are forecast, taking into account known outflows and proposed dividends to ensure that the Group maintains sufficient capital and liquidity at all times.

The latest ICAAP review was conducted for the period ended 30 June 2019 and signed off by the Board in December 2019. Regulatory capital forecasts are performed monthly and take into account expected dividends and intangible asset acquisitions and disposals as well as budgeted and forecast trading results.

The Group's Pillar III disclosures are published annually on the Group's website (www.brooksmacdonald.com) and provide further details about the Group's regulatory capital resources and requirements.

Condensed consolidated statement of comprehensive income

for the six months ended 31 December 2019

1 Comparative results have been restated to exclude discontinued operations in respect of the Ground Rents Income Fund plc ("GRIF") in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the results of discontinued operations. The comparative weighted average number of shares and therefore basic and diluted earnings per share have been restated for the effect of the share placing issued in November 2019 (Note 18).

Condensed consolidated statement of financial position

as at 31 December 2019

The Condensed consolidated financial statements were approved by the Board of Directors and authorised for issue on 11 March 2020, signed on their behalf by:

C M Connellan

CEO

B L Thorpe

Group Finance Director

Company registration number: 4402058

Condensed consolidated statement of changes in equity

for the six months ended 31 December 2019

Condensed consolidated statement of cash flows

for the six months ended 31 December 2019

Notes to the condensed consolidated financial statements

for the six months ended 31 December 2019

1 General information

Brooks Macdonald Group plc ("the Company") is the parent company of a group of companies ("the Group"), which offers a range of investment management services to private high net worth individuals, pension funds, institutions and trusts. The Group also provides financial planning as well as offshore investment management and acts as fund manager to a regulated OEIC providing a range of risk-managed multi-asset funds and a specialised absolute return fund. The Group's primary activities are set out in its Annual Report and Accounts for the year ended 30 June 2019.

The Company is a public limited company, incorporated and domiciled in the United Kingdom under the Companies Act 2006 and is listed on AIM. The address of its registered office is 21 Lombard Street, London, EC3V 9AH.

The Interim Report and Accounts were approved for issue on 11 March 2020. The Condensed consolidated financial statements have been independently reviewed but are not audited.

2 Accounting policies

a) Basis of preparation

The Group's Condensed consolidated financial statements are prepared and presented in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union. They have been prepared on a going concern basis with reference to the accounting policies and methods of computation and presentation set out in the Group's Consolidated financial statements for the year ended 30 June 2019, except as stated below. The Condensed consolidated financial statements should be read in conjunction with the Group's audited financial statements for the year ended 30 June 2019, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRS Interpretations Committee ("IFRS IC") interpretations, as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS.

The information in the Interim Report and Accounts does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The Group's Consolidated financial statements for the year ended 30 June 2019 have been reported on by the Group's auditor and delivered to the Registrar of Companies. The report of the auditor was unqualified and did not draw attention to any matters by way of emphasis. It contained no statement under section 498(2) or (3) of the Companies Act 2006.

At the time of approving the Condensed consolidated financial statements, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Condensed consolidated financial statements.

Developments in reporting standards and interpretations

Standards and interpretations adopted during the current reporting period

This is the first set of the Group's financial statements where IFRS 16 has been applied. This new standard was adopted from 1 July 2019. Under the transition method chosen, comparative information is not restated. Changes to significant accounting policies are described in Note 2b.

The following amendments to standards have also been adopted in the current period, but have not had a significant impact on the amounts reported in these Condensed consolidated financial statements:

• IFRIC 23 Uncertainty over Income Tax Treatments

• Prepayment Features with Negative Compensation (Amendments to IFRS 9)

• Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)

• Annual Improvements to IFRS Standards 2015-2017 Cycle.

Future new standards and interpretations 

A number of new standards are effective for annual periods beginning after 1 July 2019 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these Condensed consolidated financial statements. None of the standards not yet effective are expected to have a material impact on the Group's financial statements.

b) Changes in accounting policies

Except as described below, the accounting policies applied in these Condensed consolidated financial statements are the same as those applied in the Group's Consolidated financial statements as at and for the year ended 30 June 2019.

The changes in accounting policies will also be reflected in the Group's Consolidated financial statements as at and for the year ending 30 June 2020.

The Group adopted IFRS 16 'Leases' from 1 July 2019.

IFRS 16 'Leases'

IFRS 16 removes the classification of leases as either operating leases or finance leases for lessees. The standard introduces a single, on-balance sheet accounting model, which requires:

• recognition of a right of use asset and corresponding lease liability with respect to all lease arrangements in which the Group is the lessee, except for short-term leases and leases of low value assets;

• recognition of a depreciation charge on the right of use asset on a straight-line basis over the shorter of the expected life of the asset and the lease term; and

• recognition of an interest charge arising from the unwinding of the discounted lease liability over the lease term.

Transition

The Group holds property leases in relation to offices which have previously been considered operating leases under IAS 17. On transition to IFRS 16, the Group was permitted to choose from the following transition approaches:

• full retrospective transition method, whereby IFRS 16 is applied to all its contracts as if it had always applied; or

• a modified retrospective approach with optional practical expedients.

The Group has chosen to apply IFRS 16 using the modified retrospective approach resulting in no restatement of the comparative information which continues to be reported under IAS 17 and IFRIC 4.

On adoption, lease agreements have given rise to both a right of use ("ROU") asset and a lease liability. For leases previously classified as operating leases at 30 June 2019 under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 July 2019. ROU assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments on the Group statement of financial positions at the date of transition. On 30 June 2019, the Group had prepaid expenses and lease incentive balances in line with IAS 17 on the statement of financial position, to be unwound over the life of remaining leases. The prepaid and lease incentive balances at 30 June 2019 have been recognised as a depreciation charge to the ROU asset on day one of the transition to IFRS 16.

The lease liability is subsequently measured by reducing for lease payments made, adjusting the carrying amount to reflect the interest charge and any reassessment or lease modifications.

The ROU assets are subsequently measured at cost, less accumulated depreciation on a straight-line basis over the shorter of the expected life of the asset and the lease term, adjusted for any remeasurements of the lease liability, for example a change in lease term, or payments based on an index. In accordance with IAS 36, ROU assets are assessed for indicators of impairment at the end of each reporting period.

The Group has used the following practical expedients when applying IFRS 16 to leases that were previously classified as operating leases under IAS 17 at 30 June 2019:

• applied the practical expedient to grandfather the assessment of which contracts are leases and applied IFRS 16 only to those that were previously identified as leases. Contracts not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is a lease. The identification of a lease under IFRS 16 was therefore only applied to contracts entered into (or modified) on or after 1 July 2019;

• the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

• the accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term leases. The Group recognises the lease payments associated with these leases as an expense in the Condensed consolidated statement of comprehensive income on a straight-line basis over the lease term;

• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and

• reliance on previous assessments on whether leases are onerous.

Impact on the Condensed consolidated statement of financial position as at 1 July 2019

The adjustments to the Condensed consolidated statement of financial position reflect the initial application of IFRS 16.

The table below presents operating lease commitments disclosed at 30 June 2019 and lease liabilities recognised at 1 July 2019.

Impact on financial statements for the six months to 31 December 2019

During the six months ended 31 December 2019, the Group recognised an interest charge arising on lease liabilities of £116,000 and a depreciation charge on the ROU assets of £533,000. Included within the interest charge and depreciation charge was £80,000 and £247,000 respectively for a new lease that commenced during the six months ended 31 December 2019.

An analysis of ROU assets is presented in Note 12 and lease liabilities presented in Note 14.

The Group applied judgement in calculating the discount rate to be used in computing lease liabilities. The Group performed research into issued corporate debt in the comparable industry given the Group does not have any debt of its own, resulting in estimating its incremental borrowing rate of 4.5% to measure lease liabilities.

3 Segmental information

For management purposes the Group's activities are organised into three operating divisions: UK Investment Management, International and Financial Planning. The Group's other activity, offering nominee and custody services to clients, is included within UK Investment Management. These divisions are the basis on which the Group reports its primary segmental information to the Group Board of Directors, which is the Group's chief operating decision maker. In accordance with IFRS 8 'Operating Segments', disclosures are required to reflect the information which the Board of Directors uses internally for evaluating the performance of its operating segments and allocating resources to those segments. The information presented in this Note is consistent with the presentation for internal reporting.

Revenues and expenses are allocated to the business segment that originated the transaction. Revenues and expenses that are not directly originated by a particular operating business segment are reported as 'Group & consolidation adjustments'. Sales between segments are carried out at arm's length. Centrally incurred expenses are allocated to business segments on an appropriate pro rata basis. Segmental assets and liabilities comprise operating assets and liabilities, those being the majority of the Condensed consolidated statement of financial position.

1 Group & consolidation adjustments have been restated to exclude discontinued operations in respect of GRIF in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the results of discontinued operations.

4 Revenue

1 Comparative results have been restated to exclude discontinued operations in respect of GRIF in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the results of discontinued operations.

a) Geographic analysis

The Group's operations are located in the United Kingdom and the Channel Islands. The following table presents external revenue analysed by the geographical location of the Group entity providing the service.

1 Comparative results have been restated to exclude discontinued operations in respect of GRIF in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the results of discontinued operations.

b) Major clients

The Group is not reliant on any one client or group of connected clients for the generation of revenues.

5 Other losses

Other losses represent the net changes in the fair value of the Group's financial instruments and intangible assets recognised in the Condensed consolidated statement of comprehensive income.

6 Taxation

The current tax expense for the six months ended 31 December 2019 was calculated based on the Corporation Tax rate of 19.0%, applied to the taxable profit for the six months ended 31 December 2019 (six months ended 31 December 2018: 19.0%; year ended 30 June 2019: 19.0%).

Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

During the six months ended 31 December 2019, the Group moved from a large company to a very large company for Corporation Tax payment on account purposes. Four payments are now made during the financial year, followed by a balancing payment or repayment following the year end. Previously, the Group would pay two payments on account during the financial year and two following the financial year end. During the six months ended 31 December 2019, the Group therefore made four payments on account as opposed to two in the six months ended 31 December 2018.

The Finance (No.2) Act 2015, which was substantively enacted in October 2015, will reduce the main rate of Corporation Tax to 17.0% in 2020. Deferred tax assets and liabilities are calculated at the rate that is expected to be in force when the temporary differences unwind but limited to the extent that such rates have been substantively enacted. The tax rate used to determine the deferred tax assets and liabilities is therefore 17.0% (six months ended 31 December 2018: 17.0%; year ended 30 June 2019: 17.0%) and will be reviewed in future years subject to new legislation.

During the year ended 30 June 2019, the Group made a claim for research and development tax relief in relation to qualifying expenditure on software development incurred in the year ended 30 June 2018. This resulted in a reduction in the Corporation Tax liabilities in the respective years, and a repayment of £325,000 was due from HM Revenue and Customs. The Group will consider whether claims can also be made for qualifying expenditure incurred in the year ended 30 June 2019 and thereafter in due course.

7 Discontinued operations

During the six months ended 31 December 2019, the Group did not recognise any discontinued operations.

On 10 May 2019, Brooks Macdonald Funds Limited, a subsidiary within the Group, resigned as investment manager of the Ground Rents Income Fund plc ("GRIF"). The fund management of GRIF was classed as Property Funds within internal management information and was managed separately to the other funds within the Group. As a result, the operations were classified as discontinued upon resignation, resulting in comparative information in these Condensed consolidated financial statements for the six months ended 31 December 2018 to be restated. Disposal costs of £12,000 were incurred by the Group in relation to the resignation, during the year ended 30 June 2019.

On 31 December 2018, the Group disposed of its Employee Benefits business within the Financial Planning segment. Initial cash consideration of £50,000 was received on completion. Additional cash consideration is receivable in the first calendar quarter of 2020, being a multiple of revenue earned by the disposed business for the year ended 31 December 2019. On disposal the contingent consideration receivable was estimated at £232,000, which was recognised at its fair value of £219,000 based on the discounted forecast cash flows. Disposal costs of £21,000 were incurred by the Group in relation to the sale during the year ended 30 June 2019. Following the year ended 31 December 2019, the final consideration was calculated to be £177,000 and was received in February 2020. This outstanding amount was recognised as a financial asset at fair value through profit or loss at 31 December 2019, net of finance income of contingent consideration (Note 13).

On 1 December 2017, the Group disposed of its Property Management division, comprising the owned subsidiaries Braemar Estates (Residential) Limited and Braemar Facilities Management Limited. Full details of this disposal are disclosed in Note 11 of the 2018 Brooks Macdonald Group plc Annual Report and Accounts. During the year ended 30 June 2019, the Group received £483,000 of contingent consideration (Note 13) and a further £60,000 as additional post-completion consideration. During the six months ended 31 December 2019, the Group received the final contingent consideration payment at its fair value of £390,000.

The presentation of the information for the six months ended 31 December 2018 below has been restated to separate the results of the additional discontinued operations, consistent with the presentation in the year ended 30 June 2019. The previously reported discontinued operations at 31 December 2018 recognised the operations of the Employee Benefits business; however, the GRIF operations have now been included.

a) Profit or loss of discontinued operations

b) Gain on disposal of discontinued operations

8 Earnings per share

The Board of Directors considers that underlying earnings per share provides a more appropriate reflection of the Group's performance in the period. Underlying earnings per share are calculated based on 'underlying earnings', which is defined as earnings before underlying adjustments listed below. The tax effect of these adjustments has also been considered.

Earnings for the period used to calculate earnings per share as reported in these Condensed consolidated financial statements were as follows:

1 Comparative results have been restated to exclude discontinued operations in respect of GRIF in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the results of discontinued operations.

Basic earnings per share is calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of shares in issue throughout the period. Diluted earnings per share represents the basic earnings per share adjusted for the effect of dilutive potential shares issuable on exercise of employee share options under the Group's share-based payment schemes, weighted for the relevant period. The weighted average number of shares in issue during the six months ended 31 December 2019 was as follows:

1 The comparative weighted average number of shares have been restated for the effect of new ordinary shares issued at a discount to their market value as part of the share placing issued in November 2019 (Note 18).

1 Comparative results have been restated to exclude discontinued operations in respect of GRIF in order to present a more appropriate period-on-period comparison. Refer to Note 7 for details of the results of discontinued operations. The comparative weighted average number of shares and therefore basic and diluted earnings per share have been restated for the effect of new ordinary shares issued at a discount to their market value as part of the share placing issued in November 2019 (Note 18).

9 Dividends

An interim dividend of 21.0p (six months ended 31 December 2018: 19.0p) per share was declared by the Board of Directors on 11 March 2020. It will be paid on 24 April 2020 to shareholders who are on the register at the close of business on 27 March 2020. In accordance with IAS 10, this dividend has not been included as a liability in the Condensed consolidated financial statements at 31 December 2019.

A final dividend for the year ended 30 June 2019 of 32.0p (year ended 30 June 2018: 30.0p) per share was paid to shareholders on 8 November 2019.

10 Intangible assets

a) Goodwill

Goodwill acquired in a business combination is allocated at acquisition to the cash generating units ("CGUs") that are expected to benefit from that business combination. The carrying amount of goodwill in respect of these CGUs within the operating segments of the Group comprises:

At the reporting date there were no indicators that the carrying amount of goodwill in relation to all the CGUs should be impaired therefore the recoverable amount calculations have not been performed.

b) Computer software

Computer software costs are amortised on a straight-line basis over an estimated useful life of four years. Costs incurred on internally developed computer software are initially recognised at cost and when the software is available for use the costs are amortised on a straight-line basis over an estimated useful life of four years.

c) Acquired client relationship contracts

This asset represents the fair value of future benefits accruing to the Group from acquired client relationship contracts. The amortisation of client relationships is charged to the Condensed consolidated statement of comprehensive income on a straight-line basis over their estimated useful lives (15 to 20 years).

d) Contracts acquired with fund managers

This asset represented the fair value of the future benefits accruing to the Group from contracts acquired with fund managers. Payments made to acquire such contracts are initially recognised at cost and amortised on a straight-line basis over an estimated useful life of five years.

11 Property, plant and equipment