6 Nov 2020 07:00
Equiniti Group plc
Incorporated in England and Wales
Registration number: 07090427
LEI: 213800TS721HGE2JIV94
ISIN: GB00BYWWHR75
6 November 2020
EQUINITI GROUP PLC - TRADING UPDATE
Equiniti Group plc ("EQ" or "the Group"), an international technology-led services and payments specialist, today issues the following trading update for the period 1 July 2020 to 5 November 2020, addressing both strategic progress and the near-term trading conditions which continue to be difficult.
Summary
Despite the usual seasonal acceleration into the fourth quarter, the current external environment remains very challenging and is expected to remain so for the balance of the year. Whilst non-discretionary, long-term contracts accounting for c75% of Group revenue have been sustained throughout the period, the ongoing disruption to capital markets and the wider economy continues to hold back any material recovery in market-paid and discretionary revenues. These revenues arise mainly from interest receivables, commission and fee-based income from capital market activity and discretionary projects in EQ Digital. In aggregate around half of the Group's discretionary revenues remain impacted, and although our order intake is 33% ahead of last year excluding renewals, and 48% for all business, the translation of these orders into a meaningful increase in revenues is not expected in the current financial year and a number of these new contracts are multi-year.
Since market-paid revenues are inherently high margin in nature, swift and impactful cost actions have been taken during the first half to reduce the net impact of the COVID-19 restrictions on earnings, including the cancellation of pay reviews for the majority of colleagues, the displacement of third party spend, the elimination of hiring and the acceleration of programmes for automation and digitalisation. These measures continue to reduce operating costs with an in-year reduction of £16m with a similar saving in financial year 2021.
The Group continues to generate cash and progress is being made to reduce working capital, with a modest reduction in net debt expected over the second half. Liquidity and headroom remain good, with more than £175m of stable liquid resources, and covenant headroom of c£60m of net debt. The Board remains focused on the reduction of leverage and the generation of free cash as the Group's preeminent priority and is exploring the divestment of a number of non-core assets should market conditions allow. Capital expenditure programmes have been re-prioritised to match the current conditions without affecting investment in core customer facing technology and planned efficiency improvements.
Commenting on the latest trading and outlook, Guy Wakeley Chief Executive observed: "Current trading continues to be difficult, although we are seeing the usual acceleration into Q4. We continue to make strategic progress as evidenced by our strong order intake and resilient financial position, but pending any recovery in our markets we continue to tightly manage costs and cash flow through this now extended period of disruption."
Divisional trading
The fidelity of our blue-chip client base remains strong and all recurring revenues have been sustained throughout the year. All renewing relationships have retained or extended, including the in-principle extension of the MyCSP contract for the Principal Civil Service Pension Scheme, the Group's largest single contract, to at least the end of December 2023. New client wins have been particularly encouraging with wins across all divisions as the Group maintained or increased its market share in all services.
EQ Boardroom
EQ Boardroom continues to cement its market-leading position in the UK as the provider of choice for new issuers of equity and clients seeking to transfer their services for share registration and employee share plans. During the year five new mandates have been won for main market IPOs including Hut Group and SourceBio International and four share registration clients have transferred from competitors including one large FTSE 100 company. Over the last 24 months 18 clients for registration and 28 clients for share plans have chosen to transfer their business to EQ, embedding value for future years. The reduction in dividend reinvestment plans, share dealing programmes and corporate actions has impacted market-paid revenues in EQ Boardroom, and it is expected that these activities will not return to growth before 2021 assuming more normal market conditions return.
EQ Digital
EQ Digital is dependent upon regulatory services and remediation volumes which have been suppressed whilst banking sites have been closed, and by the sale of software and services for credit and case management into financial services and the public sector. Despite a reduction in volumes as a direct effect of restrictions on client sites, remediation volumes have remained resilient and there have been encouraging sales of credit and mortgage platforms to Hodge Bank and the Development Bank of Wales, and case management software opportunities brought about by the pandemic including an ATOL claims platform for the Civil Aviation Authority and emerging opportunities in loan servicing and collections. The imperatives for growth in regulated software and services continue and there are multiple opportunities for organic growth in 2021.
EQ Paymaster
EQ Paymaster has had a pleasing performance with a number of key renewals in the period including Canada Life, MyCSP, HP, Hays and Prudential. The division has also secured a significant number of new clients in the period including HSBC, Monument, Sovereign, Royal London and Link. This unprecedented intake of new business provides momentum for an expected return to growth for EQ Paymaster during 2021.
EQ US
EQ US continues to gain market share in both transfer agency and share plans, with new clients including Diamond Hill Investments, Fulton Financial, and Richardson Electronics for transfer agency and more than 20 share plan clients including FS Bancorp, Vertex, and Sportsman's Warehouse. Importantly, share plan sales are expected to accelerate through new channel partnerships signed with Vanguard and Principal Financial, two of America's largest providers of 401K retirement plans. Market paid revenues arising from commissions and corporate actions are expected to remain weak for the balance of 2020 with a significant pipeline of opportunities and growth expected to resume into 2021. Despite the prevailing conditions, progress with the implementation of new operating platforms in the US has continued in line with our expectations and the operating synergies committed at the time of acquisition remain intact.
Interest receivables
Analysis presented in July showed that the reduction in central bank interest rates is expected to reduce interest receivables in 2020 by £8m, with a further reduction of £17m in 2021. Looking forward, trading is insulated from the potential detriment of negative interest rates through protections within the terms of our contracts.
Further cost reduction measures
In addition to the previously announced cost reduction measures and anticipating future working patterns across the Group, an extensive review of the Group's property portfolio has been undertaken and with more than 70% of colleagues identified as flexible workers, a number of sites will be closed or consolidated this year. These actions require a provision of c£9m in 2020 supporting a reduction in property costs of c£4m per annum in future years. Other re-organisation costs relating to adjusting the business will result in a non-operating charge of c£3m.
IAS 19 for Employee Benefits requires that expense should be recognised in the period that employee benefits are earned. COVID-19 will result in a significant number of days of annual leave being earned during 2020. These costs will reverse in 2021 as holiday patterns normalise and are a non-cash charge in 2020. Depending on the precise position at year end, these costs are estimated to be between £3-£4m.
These non-operating charges associated with COVID-19 are expected to total £15-16m in FY 2020.
Financial position
The Group continues to maintain a strong financial position and balance sheet with Senior Debt Facilities of £520m comprising a term loan and revolving credit facility in place until July 2024. The only financial covenant attached to the committed facility is that net debt/underlying EBITDA on a pre-IFRS 16 basis should be no more than 4.0x in 2020, 3.75x in 2021 and 3.50x from 2022. Leverage on a pre-IFRS 16 basis for the current year is expected to be equal or better to 3.4x providing comfortable covenant headroom. Liquid resources are in excess of £175m and have been sustained at or around this level throughout 2020.
Outlook
Whereas the underlying business remains resilient, market-paid and discretionary revenues will continue to be affected by the continuing disruption to capital markets and the reduction in central bank interest rates. Whilst significant uncertainty remains in the operating environment, guidance for full year 2020 is given as follows:
Revenue : £480m to £490m
Underlying EBITDA : £93m to £97m
Cash conversion : 75%-85%
Capital expenditure / sales : 7%
Leverage : 3.2x - 3.6x post-IFRS 16
Looking forward, market leading positions have been sustained and strengthened for all of the Group's core services and a significant backlog of orders have been taken, with sales intake during the period to October 2020 ahead of the prior year by 48%. Non-discretionary revenues and prices remain sustainable, and the Board remains confident with the resilience and sustainability of all recurring business lines. EQ's strategy of focusing on superior service and operations is continuing to drive client fidelity and advocacy and supports progressive increases in market share. For the short-term, market-paid and discretionary revenues continue to be held back by the current economic and capital market disruption, yet further organic revenue and EBITDA progression is expected once market conditions normalise.
Analyst and Investor call
A conference call for analysts and investors will be held today at 8:15am.
Conference call details:
Dial-in: +44 (0) 20 3936 2999 Access Code: 700413
A replay of the call will be available until 13 November 2020:
Dial-in: UK: +44 (0) 20 3936 3001
USA: +1 845 709 8569
Access Code: 965663
Financial Calendar
11 March 2021 Full year results announcement
6 May 2021 AGM and trading update
29 July 2021 Interim results announcement
This announcement contains inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.
For further information please contact:
Analyst/Investor enquiries:
EQ Guy Wakeley, Chief Executive +44 (0) 7484 072 471
John Stier, Chief Financial Officer Frances Gibbons, Head of Investor Relations
Media enquiries:
Temple Bar Advisory Alex Child-Villiers + 44 (0) 7795 425580 Will Barker + 44 (0) 7827 960151
Forward-looking statements
This announcement contains forward-looking statements regarding EQ. These forward-looking statements are based on current information and expectations, and are subject to risks and uncertainties, including market conditions and other factors outside of EQ's control. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. EQ undertakes no obligation to publicly update any forward-looking statement contained in this release, whether as a result of new information, future developments or otherwise, except as may be required by law.