Fih Group Regulatory News (FIH)

14th June 2016

Falkland Islands Holdings plc

("FIH" or the "Group")

Final results for the year ended 31 March 2016

A copy of the Group's results is also available on the Company's website.

FIH, the AIM quoted international services group that owns essential services businesses in the Falkland Islands and the UK, is pleased to announce its final results for the year ended 31 March 2016.

Group Financial Highlights

· Group revenue increased 1.1% to £39.0 million (2015: £38.56 million)

· Underlying pre-tax profits in line with the Board's expectations at £3.1 million (2015: £3.56 million)

· Reported diluted earnings per share 19.2p (2015: 22p)

· Net cash flow from operating activities, before capital expenditure and after tax payment at £4.8 million (2015: £6.4 million)

· Cash balances increased to £14.0 million (2015: £7.4 million)

· Bank borrowings of £3.3 million (2015: £0.7 million)

· The Board is not recommending the payment of a final dividend, in line with the strategy to reinvest earnings and cash to accelerate the Group's growth

Operating Highlights

Falkland Islands Company ("FIC") - Strong profit performance, benefiting from oil exploration activities and record squid catch

· Record £1.94 million pre-tax profits, with FIC's property rental, vehicle hire and agency services attracting high demand from oil-support workers with the 2015-2016 oil exploration drilling campaign

· FIC's broader business portfolio benefited from strong consumer confidence as a result of a record squid catch, an increase in cruise ship tourists, and significant levels of Falkland Island government expenditure

Momart - Good revenue performance, with strategic investment in sales, marketing and management systems, amidst a highly competitive art market

· Increase in overall revenue to £16.3 million (2015: £15.8 million)

· Ongoing strategic investment into sales and marketing and the strengthening of finance and management systems, in addition to increased margin pressure, reduced underlying operating profit to £0.46 million (2015: £1.24 million)

· Slow H1 followed by recovery from Autumn 2015, with involvement in installation of high-profile exhibitions including: Jackson Pollock at Tate Liverpool; World Goes Pop and Alexander Calder at Tate Modern; Fabric of India at the V&A; Ai WeiWei and Painting the Modern Garden at the Royal Academy; and Audrey Hepburn at the National Portrait Gallery.

Portsmouth Harbour Ferry Company ("PHFC") - Steady performance with modest decline in passenger numbers offset by increases in ferry fares

· Revenues slightly down by 1.3% at £4.2 million with 3% fewer passengers due to competition from a subsidised Park & Ride service, low petrol prices, and interim disruption of the Portsmouth Harbour interchange redevelopment

· Several successful initiatives to promote ferry usage, including a "Bikes Go Free" promotion which paid back its cost within 12 months

· New modern ferry vessel: "Harbour Spirit" in service from July 2015; no further significant vessel expenditure expected for over 15 years

Outlook - Quieter trading in the Falklands, offset by growth potential from Momart and steady performance from PHFC

· For the year ahead, we anticipate a quieter period in the Falklands, with less oil exploration activity and much weaker illex squid catch in Spring 2016

· At PHFC, the emphasis in the coming year will be on tight cost control, in the face of short term pressures on passenger numbers caused by cheap petrol and physical disruption caused by the reconfiguration of the passenger interchange at the Portsmouth ferry terminal

· At Momart, we anticipate a stabilising of the core trading position as we see the benefit of investment feed through, underpinning margins and continued sales growth

· Continuing to seek out acquisition opportunities, using strong balance sheet and cash position to leverage earnings and increase critical mass

Non-Trading Items

· Successful sale of residual 5 million Falkland Oil & Gas shares at a profit of £0.4m offset by one-off restructuring costs and asset write downs in SAtCO

Edmund Rowland, Chairman of FIH, said:

"At Falkland Islands Holdings, our diverse trading subsidiaries have contributed to these satisfactory results overall.

"2015-16 was a good year for the Group and an exceptional one for our Falklands business, boosted by the offshore exploration drilling campaign in the Islands. This makes us optimistic about the potential growth during any future drilling campaigns, albeit we anticipate a return to 'pre-oil' trading levels at FIC in the interim.

"The performance of Momart was satisfactory in a highly competitive market; we have continued to invest in the business to ensure the company retains its market-leading position.

"At PHFC, careful cost management was successful in largely off-setting the headwinds of lower petrol prices and subsidised travel options. This prudent approach will remain vital to our ongoing success in the near-term, and looking ahead we are positive about the longer-term benefits of the redeveloped passenger interchange and the expanded naval base.

"Overall, despite specific challenges across the business, we are in a strong position, trading in line with the Board's expectations, with a healthy cash balance and significant borrowing capacity to facilitate investment and acquisition led growth when a suitable opportunity is identified."

- End -

Enquiries:

Chairman's Statement

I am pleased to report that the Group achieved a satisfactory trading result for the year to 31 March 2016, with all 3 trading subsidiaries contributing positively to the overall result. Group revenues were ahead by £0.4 million at £39.0 million, an increase of 1.1% on the prior year (2015: £38.6 million).

Underlying pre-tax profits for the Group (before amortisation and non-trading items) for the year to 31 March 2016 were in line with the Board's expectations, at £3.1 million, £0.5 million lower than in the prior year. After non-trading items (restructuring costs, and asset write downs in the Falklands, net of profits on the sale of shares in Falkland Oil & Gas) of £0.3 million, compared to non-trading profits of £0.3 million in the prior year, reported Profit Before Tax was £2.8 million (2015: £3.9 million).

Diluted earnings per share based upon underlying profits were 19.2p (2015: 22.0p). Reported earnings per share which reflect the impact of non-trading items were lower at 17.9p (2015: 25.3p).

In line with our policy of reinvesting earnings and cash to facilitate investment and acquisition led growth, the Board is not recommending the payment of a final dividend.

At 31 March 2016, the Group's financial position was strong. Cash balances at the end of the year had increased to £14.0 million (2015: £7.4 million) with bank borrowings of £3.3 million (2015: £0.7 million). In addition to its strong liquidity position, the Group's healthy operating cash flow (2016: £4.6 million) leaves FIH with significant additional borrowing capacity to enable expansion through selective earnings enhancing acquisitions without recourse to funding from shareholders.

Operations

Performance from the Group's 3 trading subsidiaries was satisfactory, with record trading in the Falklands being offset by weaker trading in the UK at Momart and Portsmouth Harbour Ferry Company.

In the Falklands, the offshore exploration drilling programme continued almost to the end of the Group's financial year and this, together with a record squid catch in early 2015 and further growth in cruise ship passengers over the Austral summer, created buoyant trading conditions which helped the Falkland Islands Company to deliver a record trading performance. Revenue in the Falklands was flat at £18.5 million and Operating Profits, before non-trading items, boosted by buoyant property and vehicle rental income, increased from £1.3 million to £1.6 million.

At Momart, the Group's Fine Art handling business, profits were depressed by the costs of further investment to develop the company's sales and marketing infrastructure and financial reporting systems, coupled with a fiercely competitive art market which saw a squeeze on margins. Overall revenue increased by 3% to £16.3 million (2015: £15.8 million) but Operating Profits, before non-trading items, fell back to £0.5 million (2015: £1.2 million).

At PHFC, a decrease in passenger numbers of 3.3% was largely offset by a tight control of costs and modest fare increases in June 2015. However, increased interest costs from the 10 year boat loan taken out to finance the company's latest ferry, "Harbour Spirit" saw pre-tax profits from the Ferry fall from £0.8 million to £0.7 million.

Non Trading Items

In May 2015, the Group's residual holding of 5 million FOGL shares was sold at a profit of £0.4 million.

In the Falklands, falling oil prices saw the prospects of an early move towards oil production recede and with much quieter trading conditions in prospect for the foreseeable future, restructuring costs were incurred to reduce the company's ongoing cost base. The Group's total restructuring costs, including £0.1 million at Momart, amounted to £0.3 million (2015: £0.2 million). At the same time the carrying values of specialist plant and machinery owned by the Group's construction Joint Venture "SAtCO" were reviewed, resulting in write downs to the Group's investment of £0.3 million.

Outlook

The current suspension of exploration drilling in Falklands' waters and the continued uncertainty over oil prices means that the outlook for FIC in the near term is much quieter with a return to the more modest trading levels seen prior to the start of oil exploration activity over 10 years ago. However, following recent modernisation, our Falklands' business is well invested and no further significant capital expenditure is anticipated in the foreseeable future.

Increased tourism in the Falklands will be a long term positive factor in the growth of the Islands' economy but the development of oil production in the Falklands is the key to unlocking dramatic returns and this in turn will depend on a sustained recovery in the oil price and an appetite by the oil & gas industry to take advantage of the lowering cost environment for offshore developments. Although the timing of any oil development remains uncertain, in the interim FIC will remain a profitable and cash generative business.

At Momart, the expansion of commercial art storage facilities at Leyton is now imminent with opening expected in summer 2016. The 33% increase in storage space, with enhanced climate control and client viewing facilities, will be a key driver of long term growth. In the short term, this will lead to an increase in the company's fixed cost base, but all efforts will be made to ensure the new storage facility achieves breakeven within the first year with subsequent growth seeing an immediate contribution to bottom line profitability.

Development of a more proactive sales and marketing approach continues, aimed at creating a platform from which to leverage Momart's established reputation into the commercial and private client market. This should see a steady recovery in profitability in what remains a highly competitive market.

For PHFC, cheap petrol prices and disruption caused by the redevelopment of the public transport hub at Portsmouth Harbour will continue to make journeys by car an attractive alternative to crossing by ferry. In the near term therefore, tight cost control will be essential in defending profitability but the expansion of the Naval Dockyard to support the arrival of the Royal Navy's Queen Elizabeth class aircraft carriers from 2017 and plans for redeveloping the waterfront in Gosport should create more benign trading conditions in the medium term.

With the return to "pre-oil" trading levels in the Falklands next year and broadly stable albeit challenging trading conditions for the Group's UK businesses, overall profitability is expected to be subdued in the near term.

Future Group Strategy

The low price of oil means that the development of proven oil reserves in the Falklands will now be delayed and although the board of FIH remains confident that oil production and dramatic economic growth will ensue in the Falklands in due course, the timing of this remains uncertain. However, following the substantial capital and human investment in FIC seen in the past few years, the company is well placed to take full advantage of the growth that will ultimately emerge.

With further growth in the Falklands now delayed, the Group's focus in the near term has shifted to developing its UK operations through further investment in its existing businesses and through the pursuit of high quality acquisitions. This will be facilitated by the Group's record cash reserves of £14 million (£1.13 per share) and solid existing earnings base which provides untapped borrowing capacity. This strategy, to create a platform for sustainable long term growth, is aimed at creating a larger quoted entity with a wider appeal to investors that will in turn enhance shareholder liquidity and the Group's rating. A number of opportunities were reviewed during the year and none were progressed to completion as the Board has been prudent in evaluating asking prices and in targeting only high quality, low risk prospects. The Board's focus in the coming year will be to continue to develop its existing businesses whilst seeking a high quality acquisition that will significantly enhance the long term prospects for a sustained growth in shareholder value.

Edmund Rowland

June 14 2016

Managing Director's Strategic Review 

Group Overview

I am pleased to report on another satisfactory year of trading for the Group, with revenues ahead by £0.4 million at £39.0 million (2015: £38.6 million) and underlying pre-tax profits, as expected, a little lower at £3.1 million (2015: £3.6 million). Reported profits before tax after non trading items (net expenses of £0.28 million) were £2.80 million (2015: £3.89 million). Operating cash flow was strong and the Group ended the year with record levels of cash of £14.0 million (2015: £7.4 million).

In the Falklands, FIC had a record year, taking full advantage of the boost to the Falklands' economy from the exploration drilling programme which ran throughout the year, and another exceptional squid catch in early 2015. In contrast, Momart, the Group's fine art handling and logistics company, experienced challenging market conditions and further strategic investment in sales and marketing and management information systems saw a reduction in profitability. At PHFC despite reduced passenger volumes, revenues remained broadly stable but increased operating and finance costs, linked to the company's new ferry Harbour Spirit, also saw profits lower than the prior year.

Review of operations

 Group revenue and Underlying Pre-Tax profits* are analysed below:

Non trading items (see notes below) -0.28 0.33

* Pre-tax profit before amortisation of intangibles and non-trading items, but including the Group's share of the contribution from SAtCO, the Group's Joint Venture with Trant Construction in the Falkland Islands.

Non trading items include profits on the sale of the FOGL shares, restructuring costs, write downs on assets in SAtCO, profit on the sale of a vessel and amortisation of intangibles acquired on the purchase of Momart in 2008.

Falkland Islands Company

In the year to 31 March 2016, the Falklands benefited from the stimulus to the local economy from the offshore drilling campaign which commenced in early 2015 and ran on until February 2016 when the planned 6 well programme was curtailed after the drilling of 4 wells due to operational issues and the sharp fall in the price of oil. Trading profitability in FIC had already increased by 39% in the prior year and ratcheted up by a further 25% to a record £1.94 million in the year to 31 March 2016 as demand for the company's local services was stimulated by the presence onshore of oil support workers for the whole of the financial year. FIC benefited in particular from increased corporate demand for rented houses, hire vehicles and agency services for oil exploration. In the wider economy, confidence was boosted by another record squid catch in Spring 2015 and a further increase in cruise ship activity over the austral summer (November 2015 to March 2016). With a strong fiscal revenue base, Falkland Island government expenditure was maintained at record levels and this benign backdrop saw consumer demand continue at the high levels seen in the prior year, benefiting FIC's broad spread of retail and support service businesses. As a result, the pre-tax contribution of the Group's Falklands' business moved to record levels, with pre-tax profits increasing by £0.38 million (+24.5%) to £1.94 million (2015: £1.56 million).

Oil developments

During the year, oil companies led by Premier Oil ("PMO") and Noble Energy commenced the long-awaited third phase of exploration drilling, with 3 wells drilled in the Northern Basin and a 4th deep water well ("Humpback") in the geologically separate basin to the South East of the Islands.

Results from the 3 Northern wells were particularly encouraging, leading to increased resource estimates for Premier's Sea Lion field (increased to 520 mbbls) and the nearby independent Isobel complex. In the South East basin, results from drilling the large Humpback prospect by Noble Energy and Falkland Oil & Gas in August 2015, were less encouraging with no indication of commercially exploitable hydrocarbons discovered. Following on from this there was a further consolidation of the smaller oil exploration companies in the Falklands with the absorption of Falkland Oil and Gas (which had in turn recently merged with Desire Petroleum) by Rockhopper Exploration plc. In February 2016 "Operational issues" with the Eirik Raude rig, led to the curtailment of the planned drilling programme with only 4 wells completed; a further 2 wells had been originally planned. Continued weakness in the oil price, saw Noble Energy withdraw its operational team from the Falklands in March 2016 and in May Premier Oil reported it was "progressing cautiously" with detailed plans to develop its Sea Lion and Isobel fields.

Although the very positive results from the Northern wells have made the prospect of commercial oil production in the Falklands ultimately more attractive and hence more likely, the continued weakness of the oil price remains a major stumbling block to moving towards commercial oil production in the near term. On a positive note, related downward pressure on the oil industry supply chain has seen a continuing fall in field development costs and in May 2016, Premier Oil reported it was targeting further savings in order to make a development of the Sea Lion field viable at $55 per barrel, (In May 2016, PMO estimate project viability at $65 bbl). With a recovery in oil prices since the sub-$30 lows in January 2016, the "project viability gap" for Sea Lion has narrowed considerably but further increases in the price of oil and the reliable prospect of a sustained recovery in such prices will be essential before commercial development of oil proceeds in the Falklands.

Despite the uncertainty over oil, with a further £1.2 million invested in FIC in 2015-16 (and over £9 million invested by the Group in the Falklands in the last 6 years) the business infrastructure of FIC has been fully modernised and the company is now well placed to take full advantage of an eventual move to oil production in the medium term.

Trading

Overall revenue in FIC was unchanged at £18.5 million (2015: £18.5 million).

Total retail sales in FIC increased by 1.3% to a record £9.66 million (2015: £9.54 million).

FIC Retail sales achieved record levels with a particularly encouraging 4.5% increase at the company's flagship West Store which accounts for over 60% of total retail sales and has grown over 10% in the past 2 years. This was achieved despite staff retention problems caused by the availability of short term oil contracts for unskilled workers. Clothing and Electrical sales were broadly flat but Grocery / Household sales in the Foodhall increased by 6% as customers responded to continuing improvements in the fresh food and delicatessen offers.

Warehouse sales to local retailers and pubs (10% of West Store sales) continued to come under pressure as direct sourcing from the UK increased and sales declined by 8% albeit much less than the 22% decline seen in 2014-15.

Sales at the Capstan gift shop increased by 8% as cruise ship numbers rose to near pre-Crash levels of c.56,500 (2015: 50,000) and spend from transiting oil workers continued to boost revenue. After a slow start to the year, sales at FIC's general store at the Mount Pleasant military base ("West Store MPA") picked up as refurbishment activity at the military base commenced in late 2015 supported by an increased establishment of civilian workers from the UK; annual revenues at West Store MPA grew by 3.2%.

At Home Living, timing differences in government housing completions saw demand for home furnishings decline and sales fall back 31% to 2014 levels of £0.5 million. At FIC's Builder's Merchant "Home Builder", muted demand and further disruption caused by the completion of a new customer car park at the Crozier Place site, which prevented vehicular access for 3 weeks, saw revenue decline by 4.1%. The new car park at Crozier Place, offering much improved access and off street parking for both Home Living and Home Builder customers, was completed in February 2016. The attractions of the site were further enhanced by construction of a new in-store family café in Home Living in November 2015.

With a quieter year at Home Living and Home Builder largely offsetting growth at the West Store, overall retail performance was satisfactory with a similar contribution to the prior year. Retail remains FIC's most important business unit accounting for 50% of revenue, 40% of the total workforce and around a third of FIC's overall contribution.

In FIC's automotive business, Falklands 4x4, strong growth in vehicle sales saw revenues increase by 28.1% to £3.93 million, eclipsing the former record set last year. Despite the absence in recent years of sales to MoD which had previously supported c 50 units pa, sales to local consumers picked up strongly and in 2015-16, FIC's vehicle sales increased from 76 units in the prior year to 110, as revenue from used vehicles increased and "new" sales were bolstered by demand for the outgoing Defender for which FIC secured its final factory delivery stock from Land Rover late in the year. Strong corporate demand linked to oil exploration saw the contribution from vehicle hire more than triple income in the year, to record levels.

Revenues from third party freight and port services dropped by 27.6% to £0.9 million (2015: £1.24 million) as the exceptional volumes shipped in prior years to help prepare the infrastructure for oil exploration reverted to more normal levels.

Support Services income held up well at £1.63 million (2015: £1.66 million) with revenues from Penguin Travel rising strongly to over £0.5 million linked to the increase in cruise ship visitors. Penguin Travel's performance helped offset lower revenues from the Fishing Agency where better weather conditions on the high seas enabled foreign squid fishing fleets to operate without calling on onshore Agency support from Stanley. As in previous years there was steady progress at FIC's insurance agency.

The level of corporate demand for rental property, which had risen sharply in late 2014 continued throughout 2015-16 as the exploration drilling programme commenced and total property rental revenue increased to a record level of £0.57 million (2015: £0.36 million) across FIC's estate of 50 rental properties (which include 10 mobile homes rented to staff).

Revenue from Falkland Building Services (FBS), which focuses on building kit homes and small local construction projects, fell back by 31.5% to £1.81 million (2015: £2.64 million) as the number of new houses completed for local residents reduced from 16 last year to 12. There was also a decrease in oil related construction activity with preparatory infrastructure works being completed prior to the start of drilling in Spring 2015. With the completion of the Temporary Dock Facility for Noble Energy in the prior year, the level of subcontracted labour provided by FIC reduced.

FBS also completed FIC's new retail warehouse at Airport road on the outskirts of Stanley. The project involved the construction of 5,000sq ft of new chiller/freezer facilities and a new ambient warehouse of 8,000sq ft; 6 metres in height to the eaves. The facility was completed in November 2015 and will reduce ongoing operating costs, improve stock control and free up the old warehouse and transit shed sites in central Stanley for future redevelopment.

In its third year of operation, FIC's joint venture, the South Atlantic Construction Company, ("SAtCO") saw construction activity reduce sharply with the completion of the Temporary Dock Facility (TDF) in December 2014. Despite the lower level of construction activity, SAtCO's trading profitability improved with income from the renting out of its 250 tonne crawler crane to Premier Oil which facilitated the loading of rig support vessels operating from the TDF. Crane rental produced income for SAtCO of £0.58 million in the year and a further £0.03 million of income was generated from maintenance work for FIG. In the year to 31 March 2016 total SAtCO revenues were comparable to the prior year at £0.61 million and its profit before tax increased by 5% to £0.51 million (2015: £0.49 million). The Group's share of the after tax profits of SAtCO was £0.2 million (2015: £0.18 million).

At the end of the financial year, the premature cessation of drilling and the completion of the current phase of oil activity in the Falklands has necessitated a review of, and provision against the carrying value of SAtCO's operating assets which comprise large construction machinery. With the completion of exploration drilling and uncertainty over the move towards oil production these large items of plant and machinery are considered to have limited commercial value in their current location in the Falklands and options for transporting these assets back to the UK for early sale are currently being explored. With the downturn in the global oil industry the realisable value of these assets has fallen sharply and accordingly a provision of £0.6 million has been made in SAtCO's accounts against the carrying value of these assets. The Group's share of the after tax cost of this exceptional write down is £0.3 million.

FIC Key Performance Indicators and Operational Drivers

*Includes ten mobile homes rented to staff.

FIC ended the year with a headcount of 172, 12 lower than in March 2015. FIC's total establishment has grown by 53 since March 2012 due to a significant expansion in FBS (+25), an increase in Falklands 4x4's garage services repairs team (+10), a further 10 staff in Retail to provide additional in-store services and the balance of 8 in administration.

While the timing of oil development remains uncertain, the Falklands' economy will be sustained (albeit at lower levels) by the traditional areas of squid fishing and tourism ensuring a healthy base level of profitability is maintained at FIC.

Portsmouth Harbour Ferry Company ("PHFC")

2015-16 saw another steady performance from PHFC with total revenue decreasing by 1.3% reflecting a modest decline in passenger numbers which more than offset increases in ferry fares. Profit Before Tax after pontoon lease and boat loan interest charges from the new ferry vessel Harbour Spirit, was 14.1% lower at £0.68 million (2015: £0.79 million).

There was a continued decline in ferry passenger numbers, which reduced 3.3% over the year to 2.826 million (an average of 7,800 passengers per day), from 2.923 million in the prior year. After the effects of normal volatility caused by weather there was a broad consistency in the rate of decline between the first and second half of the year at -3.3%, albeit the reduction was a little higher than in the previous 2 years. (2015: 2.1%, 2014: 1.6%).

Ferry fares were increased by an average of 3% in June 2015, bringing the total cost of an adult return to £3.30, although the price of Adult 10 Trip tickets for regular customers was maintained (£1.45 per ferry journey), and lower tariffs were also left unchanged for seniors and children (£2.20/£2.10 return).

During the summer months a special "Bikes Go Free" promotion (normal tariff £1.20 return) was run from 1st June to 1st September to encourage long term cycle use and this saw a welcome 2.5% increase in ferry travel by cyclists in the 7 months after the promotion period ended, paying-back the cost of the promotion in under 12 months. Cyclists now account for over 10% of all ferry users.

Take up of the unlimited monthly ferry and car parking joint ticket "Park & Float" ticket at £89 remained modest at less than 1% of passenger traffic, whereas the discounted ticket for military personnel was more popular accounting for 3.6% of passenger journeys in the year, a similar level to 2014-15. Demand for the "new" Solent Go electronic travel card increased following its introduction in August 2014 with this "Oyster card" for South Hampshire now accounting for 2.4% of passenger journeys, up 7 fold on the prior year.

In overall terms at under £1.50 per crossing for adults, (83p for seniors and children) the ferry service still represents excellent value compared to any alternative mode of transport other than for groups travelling by car with free or subsidised parking.

In travelling to and from Gosport to Portsmouth, the car continues to be the only serious transport alternative to the ferry. Car travel to Portsmouth, utilising the subsidised Park & Ride scheme operated by Portsmouth City Council, with dedicated buses departing every 10 minutes to Portsmouth town centre, the Naval Dockyard and the Gunwharf Quays shopping centre, continued to present a competitive challenge during the year. With low prices being bolstered by the introduction of £2.60 per vehicle tariff for regular users and low petrol prices enhancing the economics of car travel, the scheme was particularly attractive to families in school holidays and at weekends and this had a direct, adverse impact on ferry passenger volumes. Although lower diesel prices saw a reduction in ferry fuel costs, the savings were modest at less than 0.6% of revenue and did not offset the negative effects of cheaper petrol/diesel for cars.

In addition to the increased relative attraction of car travel, the convenience of the ferry service was disrupted in the year by commencement of the redevelopment of the passenger interchange at Portsmouth Harbour (the "Hard"). This will ultimately lead to improved connectivity between ferry, bus, rail and taxi services at the interchange, however, in the interim the relocation of bus stops and pedestrian walkways during construction work (which commenced in autumn 2015 and is scheduled to finish by the end of 2016), had an undoubted adverse effect on the overall convenience and appeal of ferry travel.

In the year to 31 March 2016, weekday traffic was affected more noticeably than at the weekends with an overall decline of -3.6% compared to -2.5% at weekends. Core commuter traffic held up well with a reduction of only -2.2%, whereas weekday off peak passenger traffic, which tends to be more discretionary in nature, declined by 5.7%.

Cruising income from corporate vessel hire was boosted by the Americas Cup event in Portsmouth in July 2015 and in February 2016 PHFC benefited from the sale of one of its two older vessels, Portsmouth Queen which was sold to a Thames river cruise operator for a nominal sum.

During the year PHFC's third modern ferry vessel "Harbour Spirit" with its improved passenger seating, increased space for cycles and better facilities for the disabled, was fully commissioned and came into service in July 2015. With Harbour Spirit now in operation, PHFC has 3 modern vessels and retains a fourth boat, the 1966 vintage, Gosport Queen, as a back- up. With three new ferry vessels built since 2001 and an estimated service life of over 30 years, no further significant vessel expenditure is anticipated for over 15 years.

Key Operating Metrics

Average fares per passenger journey increased by 2.8% to £1.45 (2015 £1.41).

Ferry reliability was again outstanding with on-time departures running at 99.8% (2015: 99.8%).

Looking ahead the outlook for passenger growth is more positive with arrival of the Royal Navy's new aircraft carriers and expansion of the Naval Base expected to commence in 2017. In addition in Spring 2016, Gosport Council announced plans to redevelop the bus station complex at the waterfront adjacent to the ferry terminal. The Council has invited private sector tenders to bid for a mixed use development with increased retail and leisure facilities which increase the appeal of the Gosport waterfront / ferry terminal area as a destination and thus enhance the medium term outlook for passenger numbers.

PHFC Key Performance Indicators and Operational Drivers

Momart

Momart, the Group's art handling and logistics business, had a challenging year and despite overall revenue increasing by 3.2% to £16.3 million (2015: £15.8 million), increased overheads linked to investment in sales and marketing and strengthening of finance and management information systems, coupled with increased pressure on margins saw underlying operating profit reduce by 62.9% to £0.46 million from £1.24 million in 2015.

Net finance costs in the year were negligible as borrowings were repaid.

Underlying Profit Before Tax before amortisation of intangibles was £0.46 million (2015: £1.21 million)

Museum Exhibitions

After a slow start with Q1 sales down 19% on the prior year, Exhibitions activity recovered strongly throughout the remainder of the year. Revenue from large UK museum exhibitions, which form the bedrock of Momart's market-leading reputation, accounted for more than half of total Exhibition activity, and increased by 22% compared to the prior year. During 2015-16 in the UK, Momart was involved in the installation of a number of prestigious and popular exhibitions including Jackson Pollock at Tate Liverpool, World Goes Pop and Alexander Calder at Tate Modern, Delacroix and Modernity at the National Gallery, Fabric of India at the V&A, Egypt: Faith After the Pharaohs at the British Museum, Ai WeiWei and Painting the Modern Garden at the Royal Academy and Audrey Hepburn at the National Portrait Gallery.

Activity linked to smaller private and regional exhibitions was less buoyant with sales flat year on year but UK margins overall held up well compared to 2014-15. In contrast, overseas contracts (revenue from overseas clients) which typically involve high added value / high margin work (specialist packing etc.) fell back from the high levels seen in the previous 2 years, declining by 23% (£1.7 million) from £7.5 million to £5.8 million (see KPI table below). This reduction in the level of overseas contracts was a key factor in the overall decline in Momart's profitability during the year.

By 31 March 2016, Momart's order-bank of large UK Exhibitions had increased to £4.47 million, an increase of 37% compared to the prior year (2015: £3.26 million), (see KPI table below). This healthy order book provides a stronger platform for the coming year albeit the headline revenue figure for Museum contracts provides only a general guide to added value and margins with Museum work vary considerably depending on the mix of jobs and in particular the level of services that need to be outsourced to overseas agents.

Galleries & Private Client Services

Gallery Services revenues, which include revenues from private and corporate clients, increased by an encouraging 11.8% to £5.82 million (2015: £5.21 million), reflecting an increased emphasis on proactive sales and marketing and on business development. Revenue from galleries remained the largest element and increased by 25% compared to 2014-15 as new relationships were developed with leading international galleries especially those expanding their presence in the growing London market. Activity with private and corporate clients also increased although once again, as with Exhibitions, the level of lucrative work from overseas clients reduced. The mix of sales was also less profitable with more work outsourced to overseas agents and contractors compared to the previous year and this together with competitive pressure on margins meant that despite the 11.8% increase in revenue, overall gross profitability from Galleries and Private Clients was essentially unchanged compared to the prior year.

During the year, significant additional resources were invested in sales and marketing and business development, increasing overheads by £0.5 million compared to the prior year. The benefits of this increased investment and focus will flow through more fully in the coming year but in the year ended 31 March 2016 this increase in costs, together with the fall in income from overseas contracts noted above, were the prime factors responsible for the £0.8 million decrease in Operating Profits.

Storage

Storage revenues increased by 10.1% to £2.05 million (2015: £1.86 million), as 450 cubic metres of additional space was taken on in response to market demand. The buoyancy of demand for secure art storage is the key driver of the decision to progress the expansion of Momart's core storage facilities at Leyton where a 33% increase in space will be completed by August 2016. The additional space will offer improved client visitor facilities, discrete dedicated space for specific collections and enhanced viewing areas. The facility will be rented from the current landlord on a long lease coterminous with existing units on the Leyton site. Fit out costs for racking, air conditioning and lifts totalling c £1.5 million of capital expenditure will be incurred in the year to March 2017. The new facility will add c £0.5 million to annual operating costs and is targeted to reach break-even within 8 months of opening.

Although the decline in profitability seen in the year to 31 March 2016 is disappointing, the increased focus and structured approach to the market now being undertaken has laid the foundations for a more sustainable platform for long term growth in profitability which will enable the company to take full advantage of its market leading reputation and unmatched level of technical skill and customer service.

Momart Key Performance Indicators and Operational Drivers

Non Trading Items -Total Cost £0.28 million (2015: Profit £0.33 million)

· Profit on sale of FOGL shares - £0.39 million (2015: £0.7 million)

In April 2015, the Group disposed of its remaining 5 million shares in Falkland Oil and Gas for £1.40 million, an average share price of 28 pence generating a profit on disposal of £0.39 million.

· Write Down of SATCO assets - £0.33 million (2015: nil)

With the early conclusion of exploration activity in the Falklands and the uncertainty over the future demand for heavy duty construction plant and machinery in the Islands, the carrying value of the assets owned by SAtCO has been reviewed and options for disposal explored. FIH's after tax share of the provision against these assets amounts to £0.3 million. The level of contribution from SAtCO over the past 3 years and the amount of ancillary work secured as a result of the Group's investment in this construction joint venture far outweighs the costs of these write downs.

· Restructuring Costs - £0.26 million (2015: £0.23 million)

During the year the Group incurred £0.26 million of restructuring costs in relation to slimming down the senior management teams in FIC and at Momart. These changes will reduce ongoing costs without any adverse effect on operational efficiency.

· Amortisation of Intangibles £0.14 million (2015: £0.14 million)

Trading outlook

For the year ahead, we anticipate a quieter period in the Falklands. The squid catch in Spring 2016 dropped back from the exceptional levels seen in the previous two years and in retailing, FIC's principal competitor has pushed ahead with a 33% expansion of its own supermarket which will open in July 2016. Given these factors and the conclusion of exploration drilling with a lack of any indication of when oil activities will resume, FIC will face significant headwinds in the coming year and profits at FIC are expected to revert to the more normal "pre-oil" levels seen in prior years.

At PHFC, in the coming year the emphasis will be on tight cost control, in the face of short term pressures on passenger numbers caused by cheap petrol and physical disruption caused by the reconfiguration of the passenger interchange at the Portsmouth ferry terminal. In the longer term, plans to expand the Portsmouth naval base and new proposals to redevelop the harbour at Gosport should help to reverse the decline seen in recent years.

At Momart, we anticipate a stabilising of the core trading position as we see the benefit of the recent investment in sales and marketing feed through to underpin continued sales growth and shore up margins. Initially though, the warehouse expansion will be a drag on profits, with an increase in fixed costs not fully covered by new storage revenue in the first year. Over the medium term however, as Momart's new facilities reach capacity, prospects for a steady and sustained recovery in profitability are good.

John Foster

Managing Director

14 June 2016

Managing Director's Strategic Report (continued)

Financial Review

Revenue and underlying operating profit

Group revenue rose 1.1% to £39.0 million, however underlying operating profit decreased 12.3% to £3.30 million in the year ended 31 March 2016 as the benefits of the oil activity in the Falkland Islands was offset by a reduction in profit at Momart. These variances are discussed in more detail above in the Review of Operations.

Non-trading items

Non-trading items amounted to a net cost of £0.28 million (2015: profit of £0.33 million), and comprise a £0.39 million gain on the sale of 5,000,000 Falkland Oil and Gas shares (2015: £0.71 million), and a £0.06 million profit on the sale of "Portsmouth Queen", which had been purchased by Portsmouth Harbour Ferry Company in 1966. These non-trading gains have been offset against:

· A £0.33 million impairment to the carrying value of plant & machinery owned by SAtCO;

· £0.26 million of restructuring costs in relation to slimming down the senior management teams in FIC and Momart; and

· £0.14 million amortisation charge of intangible assets, in relation to the net book value of Customer relationships acquired within Momart in March 2008.

Net financing costs

The Group's net financing costs remain relatively little changed to the prior year at £0.2 million, with an increase in bank interest payable from the bank loans drawn down by the Ferry business following the acquisition of the £3.3 million vessel "Harbour Spirit" offset against the reduction in the interest expense on the unfunded defined benefit scheme in the Falklands and as the interest and amortised loan fees ceased on the loan to acquire Momart, which was fully repaid in the year to 31 March 2015.

Underlying pre-tax profit

As expected, the Group reported underlying pre-tax profits of £3.08 million, 13.5% down on the prior year, (2015: £3.56 million).

Reported pre-tax profit

After the non- trading items noted above, reported Profit Before Tax for the Group decreased by 28.1% to £2.80 million (2015: £3.89 million).

Taxation

The Group pays corporation tax on its UK earnings at 20% and on earnings in the Falkland Islands at 26%. The Falkland Islands Company Limited, which is resident in both jurisdictions, has been granted a foreign branch exemption, and as a result no longer pays UK corporation tax. As a result FIC enjoys the full benefit of the tax deductibility in the Falkland Islands of expenditure on commercial and industrial buildings. The effective blended tax rate on underlying profits is 22.7% (2015: 23.2%).

Managing Director's Strategic Report (continued)

Earnings per share

Fully diluted Earnings per Share ("EPS") derived from underlying profits, fell to 19.2 pence (2015: 22.0 pence), due to the fall in the underlying profit before tax.

Balance sheet

The Group's Balance Sheet remains strong. Total net assets increased to £38.6 million from £36.7 million in the prior year.

Retained earnings, after corporation tax, increased by £2.5 million to £18.8 million (2015: £16.3 million). Bank borrowings increased to £3.3 million (2015: £0.7 million), due to the drawdowns of loans in the Ferry business to cover the cost of new vessel, which had been purchased in the prior year, but because of the strong underlying cash flows, the Group's cash balances increased by £6.6 million to £14.0 million (2015: £7.4 million).

The carrying value of intangible assets at £12.0 million has reduced from the £12.2 million at 31 March 2015, due to the amortisation charge.

The net book value of property, plant and equipment increased by £0.3 million to £19.9 million (2015: £19.6 million) after capital investment of £1.8 million, including £1.2 million in the Falkland Islands. This has been offset against a £1.3 million depreciation charge in the year, a £0.1 million disposal of a JCB in the Falklands, and £0.1 million of the hire fleet transferred to stock and sold through Falklands 4x4.

The Group owns investment properties, comprising commercial and residential properties in the Falkland Islands held for rental, together with approximately 400 acres of land in and around Stanley. This includes 18 acres for industrial development and 25 acres of prime mixed-use land. The Group owns 50 properties for rental, including 40 investment properties, which are mainly houses, in Stanley and ten mobile homes, which are rented to staff. The number of properties, which all are held at depreciated cost, is unchanged from the prior year. The net book value of the investment properties and undeveloped land of £3.6 million (2015: £3.7 million) has been reviewed by the Directors resident in the Falkland Islands and at 31 March 2016 the fair value of this property portfolio was estimated at £7.0 million (2015: £7.3 million), an uplift of £3.4 million on net book value.

The Group's residual 1.0% shareholding in FOGL was sold in April 2015 for proceeds of £1.4 million, resulting in a profit of £0.4 million.

Deferred tax assets relating to future pension liabilities decreased to £0.7 million (2015: £0.8 million). These assets now only include the deferred tax on the FIC unfunded scheme calculated by applying the 26% Falklands' tax rate to the pension liability.

Inventories, which largely represent stock held for resale in the Falkland Islands, increased by £0.8 million to £6.2 million at 31 March 2016 (2015: £5.4 million). The increase largely relates to stock held in the Falkland Islands.

Managing Director's Strategic Report (continued)

Trade and Other Receivables decreased by £0.5 million to £4.9 million at 31 March 2016, due to the decreased activity and improved debtor collection at Momart. Average debtor days outstanding were 33.0 (2015: 36.0).

The Group's cash balances increased to £14.0 million (2015: £7.4 million).

Bank borrowings increased from £0.7 million to £3.3 million as long term loans were drawn down to fund the acquisition of Harbour Spirit.

Outstanding finance lease liabilities totalled £5.1 million (2015: £5.1 million). £4.9 million (2015: £4.9 million) of the finance lease balance is in respect of the 50 year lease from Gosport Borough Council for the Gosport Pontoon.

Corporation tax due for payment within the next 12 months is £0.2 million (2015: £0.03 million).

Trade and other payables increased to £11.2 million from £10.2 million at 31 March 2015, reflecting increased trading activity.

At 31 March 2016, the liability due in respect of the Group's defined benefit pension scheme in the Falkland Islands was £2.6 million (2015: £2.9 million). The decreased liability is due principally to lower medium term interest rates used to discount the scheme's future liabilities. The pension scheme in the Falklands, which was closed to new entrants in 1988 and to further accrual in 2007, is unfunded and liabilities are met from operating cash flow.

The Group's deferred tax liabilities, excluding the pension asset at 31 March 2016, were £2.1 million and increased by £0.1 million from the prior year (2015: £2.0 million). £1.9 million of this balance arises on property, plant and equipment, and is principally due to accelerated capital allowances on the new vessel in PHFC and also to properties in the Falklands, where capital allowances of 10% are available on the majority of the FIC properties. With such assets depreciated over 20-50 years, a temporary difference arises, on which deferred tax is provided.

Net assets per share were 310 pence at 31 March 2016 (2015: 295 pence).

Managing Director's Strategic Report (continued)

Cash flows

Operating cash flow

Net cash flow from operating activities was £4.8 million (2015: £6.4 million); a small decrease due to the lower level of reductions in working capital in the current year.

The Group's Operating Cash Flow can be summarised as follows:

Managing Director's Strategic Report (continued) 

Financing outflows

During the year the Group incurred £1.9 million of capital expenditure (2015: £4.9 million); £1.2 million was invested in Stanley, including £0.5 million on racking and general preparation of the new warehouse and freezer facilities at Airport Road, £0.3 million spend on tarmacking the new car park at Crozier Place, which includes FIC's newly expanded Builders Merchant, Home Builder, and £0.1 million spend on a new café, with a soft play area within Home Living. In addition, £0.1 million was spent on replacement vehicles for the hire vehicle fleet. At PHFC, £0.1 million was spent on the Portsea pontoon, and £0.1 million was incurred to complete and commission Harbour Spirit. At Momart, £0.2 million was spent on expanding the storage areas, including the initial spend on the Unit 14 expansion at Leyton, and £0.2 million was spent on the vehicle fleet.

Two further loans totalling £2.9 million, repayable over 10 years, were drawn down by PHFC to finance Harbour Spirit, which had been purchased in the prior year. Scheduled loan repayments of £0.8 million (2015: £1.4 million) were made during the year, including £0.3 million of repayments to Gosport Council on the 50 year pontoon finance lease, £0.1 million of repayments on hire purchase leases for trucks at Momart and £0.5 million of repayments on the three PHFC loans.

John Foster

Managing Director

14 June 2016

Board of Directors and Company Secretary

Edmund Rowland, Chairman

Edmund was appointed to the Board on 16 April 2013, and became Chairman on 9 February 2015. He currently serves as a Director of Blackfish Capital Management, a specialist asset manager based in London and as Chief Executive Officer of Banque Havilland S.A (London Branch), previously having gained experience in London and Hong Kong, as an analyst and investment manager with BNP Paribas S.A and Blackfish. He has broad experience of principal investing in both equity and credit capital markets, with a focus on special situations, and he sits on the board of Banque Havilland (Monaco) SAM.

Edmund is a member of the Remuneration Committee.

John Foster, Managing Director

John joined the Board in 2005. He is a Chartered Accountant and previously served as Finance Director for software company Macro 4 plc and toy retailer, Hamleys plc. Prior to joining Hamleys, he spent three years in charge of acquisitions and disposals at FTSE 250 company, Ascot plc, and before that worked for nine years as a venture capitalist with a leading investment bank in the City.

Jeremy Brade, Non-executive Director

Jeremy joined the Board in 2009. He is a Director of Harwood Capital Management where he is the senior private equity partner. Jeremy has served on the boards of several private and publicly listed international companies. Formerly Jeremy was a diplomat in the Foreign and Commonwealth Office, and before that an Army officer. He is Chairman of the Remuneration Committee.

Carol Bishop, Company Secretary

Carol Bishop joined the Company in December 2011. She is a Chartered Accountant and has previously worked for London Mining plc, an AIM listed company as Group Reporting manager. Prior to this she spent three years at Hanson plc and six years at the Peninsular and Oriental Steam Navigation Company.

Directors' Report

The Directors present their annual report and the financial statements for the Company and for the Group for the year ended 31 March 2016.

Results and dividend

The Group's result for the year is set out in the Group Income Statement. The Group profit for the year after taxation amounted to £2,222,000 (2015: £3,144,000). Basic earnings per share on underlying profits were 19.2 pence (2015: 22.1 pence).

It is the Board's considered view that the Group can best take full advantage of existing and emerging opportunities by maximising the reinvestment of profits and suspending dividend payments in order to accumulate resources to build a much more substantial group with greater critical mass in its respective markets. We believe this more focused long term approach will have greater appeal for existing and prospective investors and will significantly increase shareholder liquidity. The Board is confident that this new approach and focus will lead to more certain capital growth and greater overall returns for shareholders in the long term. Therefore, in line with the increased focus of investment and long term growth, dividend payments have been suspended and no dividend payments were made during the year. During the prior year, to 31 March 2015, an interim dividend of 4.0p per share was paid in January 2015.

Principal activities

The business of the Group during the year ended 31 March 2016 was general trading in the Falkland Islands, the operation of a ferry across Portsmouth Harbour and the provision of international arts logistics and storage services. The principal activities of the Group are discussed in more detail in the Managing Director's Strategic Report and should be considered as part of the Directors' Report for the purposes of the requirements of the enhanced Directors' Report guidance.

The principal activity of the Company is that of a holding company.

Directors

On 13 April 2015, Mike Killingley, the Senior Non-Executive, retired from the Board after ten years' service.

Directors' interests

The interests of the Directors in the issued shares and share options over the shares of the Company are set out below under the heading 'Directors' interests in shares'. During the year no Director had an interest in any significant contract relating to the business of the Company or its subsidiaries other than his own service contract.

Health and safety

The Group is committed to the health, safety and welfare of its employees and third parties who may be affected by the Group's operations. The focus of the Group's effort is to prevent accidents and incidents occurring by identifying risks and employing appropriate control strategies. This is supplemented by a policy of investigating and recording all incidents.

Employees

The Board is aware of the importance of good relationships and communication with employees. Where appropriate, employees are consulted about matters which affect the progress of the Group and which are of interest and concern to them as employees. Within this framework, emphasis is placed on developing greater awareness of the financial and economic factors which affect the performance of the Group. Employment policy and practices in the Group are based on non-discrimination and equal opportunity irrespective of age, race, religion, sex, colour and marital status. In particular, the Group recognises its responsibilities towards disabled persons and does not discriminate against them in terms of job offers, training or career development and prospects. If an existing employee were to become disabled during the course of employment, every practical effort would be made to retain the employee's services with whatever retraining is appropriate. The Group's pension arrangements for employees are summarised in note 24.

Directors' Report (continued)

Corporate Governance

As an AIM company, Falkland Islands Holdings plc is not required to comply with the UK Corporate Governance Code (the 'Code') which applies only to fully listed UK companies and adherence to which requires the commitment of significant resources and cost. However high standards of Corporate Governance are a key priority of the Board and details of how the Company addresses key governance issues are set out in the Corporate Governance section of its website by reference to the 12 principles of Corporate Governance developed by the Quoted Companies Alliance.

The Board has established Audit, Remuneration, Nominations, and AIM Rules Compliance Committees and the Company receives regular feedback from its external auditors on the state of its internal controls. The Board attaches great importance to providing shareholders with clear and transparent information on the Group's activities, strategy and financial position. Details of all shareholder communications are provided on the Group's website. The Board holds regular meetings with larger shareholders and regards the annual general meeting as a good opportunity to communicate directly with shareholders via an open question and answer session.

Share capital and substantial interests in shares

During the year no share capital was issued. Further information about the Company's share capital is given in note 26. Details of the Company's executive share option scheme and employee ownership plan can be found in note 25.

The Company has been notified of the following interests in 3% or more of the issued ordinary shares of the Company as at 31 March 2016.

Payments to suppliers

The policy of the Company and each of its trading subsidiaries, in relation to all its suppliers, is to settle the terms of payment when agreeing the terms of the transaction and to abide by those terms, provided that it is satisfied that the supplier has provided the goods or services in accordance with agreed terms and conditions. The Group does not follow any code or standard payment practice. As a holding company, the Company had no trade creditors at either 31 March 2016 or 31 March 2015.

Charitable and political donations

Charitable donations made by the Group during the year amounted to £19,229 (2015: £28,030), largely to local community charities in Gosport and the Falkland Islands. There were no political donations in the year (2015: nil).

Disclosure of information to auditor

The Directors who held office at the date of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Auditor

A resolution proposing the re-appointment of KPMG LLP will be put to shareholders at the Annual General Meeting.

Directors' Report (continued)

Annual General Meeting

The Company's Annual General Meeting will be held at the London offices of FTI Consulting, 200 Aldersgate, London, EC1A 4HD at 10.00 a.m. on 1 September 2016. The Notice of the Annual General Meeting and a description of the special business to be put to the meeting are considered in a separate Circular to Shareholders which accompanies this document.

Details of Directors' remuneration and emoluments

The remuneration of non-executive Directors consists only of annual fees for their services both as members of the Board and of Committees on which they serve.

An analysis of the remuneration and taxable benefits in kind (excluding share options) provided for and received by each Director during the year to 31 March 2016 and in the preceding year is as follows:

\* The Managing Director's bonus for the year is split into an equal split of deferred shares and cash, with the shares requiring a service condition to remain in employment for up to three years. For the year ended 31 March 2016, John Foster has been awarded a cash bonus of £35,000 and a further £35,000 of deferred shares, to be issued on 17 June 2016. These deferred shares will be provided at no cost to him in three equal tranches over the next three years.

**Until date of resignation

None of the Directors of the Company receive any pension contributions or benefit from any Group pension scheme.

The Executive Directors participate in annual performance related bonus arrangements. The Managing Director had the potential during the year of earning up to 100% of his salary. The bonuses are subject to the achievements of specified corporate and personal objectives.

Directors' interests in shares

As at 31 March 2016, the share options of executive Directors may be summarised as follows:

The mid-market price of the Company's shares on 31 March 2016 was 201.00 pence and the range in the year was 201.00 pence to 282.50 pence.

Directors' Report (continued)

The Directors' options extant at 31 March 2016 totalled 171,409 and represented 1.4% of the Company's issued share capital. The 351,848 remaining options are held by 48 other employees of the Group including subsidiary directors and senior management. Under the Company's executive share option scheme, executive Directors and senior executives have been granted options to acquire ordinary shares in the Company after a period of three years from the date of the grant. All outstanding options have been granted at an option price of not less than market value at the date of the grant. The exercise of options is subject to various performance conditions, which have been determined by the remuneration committee after discussion with the Company's advisors.

In addition to the share options set out above, the interests of the Directors, their immediate families and related trusts in the shares of the Company according to the register kept pursuant to the Companies Act 2006 were as shown below:

*John Foster's shareholding above includes all Shares held in the Company's share incentive plan in which he has a beneficial interest.

**Edmund Rowland is a Director of Blackfish Capital Management Limited, the fund manager of Blackfish Capital Alpha Fund SPC - Blackfish Talisman Fund which holds 2,815.180 shares. He does not hold any shares directly in the Company.

Share Incentive Plan

In November 2012, the Company implemented an HMRC approved Share Incentive Plan (SIP) available to employees of the Group, which enables UK and Falklands staff to acquire shares in the Company through monthly purchases of up to £150 per month or 10% of salary, whichever is lower. For every three shares purchased by the employee, the Company contributes one free matching share. These shares are placed in trust and if they are left in trust for at least five years, they can be removed free of UK income tax and national insurance contributions. During the year ended 31 March 2016 the Company purchased £600 of matching shares for Mr J Foster.

Statement of Directors' responsibilities in respect of the Annual Report, Directors' Report, Strategic Report and the Financial Statements

The Directors are responsible for preparing the Annual Report, Strategic Report, Directors' Report, and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they have elected to prepare both the group and the parent company financial statements in accordance with IFRSs as adopted by the EU and applicable law. As required by the AIM Rules of the London Stock Exchange, they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm, to the best of their knowledge that:

· these financial statements, prepared in accordance with IFRS, as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation as a whole; and

· the management report, which comprises the Chairman's Statement and the Managing Director's Strategic Report, includes a fair review of the development and performance of the business and of the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Approved by the Board and signed on its behalf by:

Carol Bishop

Company Secretary

14 June 2016

Kenburgh Court

133-137 South Street

Bishop's Stortford

Hertfordshire

CM23 3HX

Independent Auditor's Report To The Members Of Falkland Islands Holdings Plc

We have audited the financial statements of Falkland Islands Holdings PLC for the year ended 31 March 2016 set out on pages 27 to 74. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement set out on page 25, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate.

Opinion on financial statements

In our opinion:

· the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 March 2016 and of the group's profit for the year then ended;

· the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;

· the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and

· the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors' report:

· we have not identified material misstatements in those reports; and.

· in our opinion, those reports have been prepared in accordance with the Companies Act 2006.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

· adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

· the parent company financial statements are not in agreement with the accounting records and returns; or

· certain disclosures of directors' remuneration specified by law are not made; or

· we have not received all the information and explanations we require for our audit.

Craig Parkin (Senior Statutory Auditor)

For and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

St Nicholas House

Park Row

Nottingham

NG1 6FQ

14 June 2016

These financial statements were approved by the Board of Directors on 14 June 2016 and were signed on its behalf by:

J L Foster

Director

These financial statements were approved by the Board of Directors on 14 June 2016 and were signed on its behalf by:

J L Foster

Director

Registered company number: 03416346