H&t Group Plc Regulatory News (HAT)

14 August 2018

H&T Group plc

("H&T" or "the Group" or "the Company")

UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2018

H&T Group plc today announces its interim results for the six months ended 30 June 2018.

The Group financial statements have been prepared, as required, for the first time under IFRS 9 ('Financial Instruments - Recognition and Measurement').

John Nichols, H&T chief executive, said:

"We have made a solid start to the year due to the resilient nature of our product set and our digital initiatives.

Revenue is up £10.8m, across all key product segments. Profit before tax is up to £6.1m (H1 2017: £5.5m) on an IFRS 9 basis.

Steady pawnbroking growth, driven by increasing numbers of new customers and the continuing growth of the personal loans book, is pleasing. The personal lending book has increased by 19% since December 2017. We have maintained this growth, while ensuring we remain disciplined around our credit-risk management practices. The broadening of our product suite into lower APR categories has proven successful, with 54% of our personal lending now out of the High-Cost Short-Term credit category. This is important as we strive towards our vision of helping our customers to rebuild their credit rating.

We have further developed our digital platforms by upgrading and revamping our retail site, www.est1897.co.uk and our main H&T site. Our click-to-bricks retail and lending offering has been further expanded by introducing click-and-collect foreign currency. We will continue to invest in digital technology as we refine the pawnbroking model and leverage our store estate."

KEY FINANCIAL RESULTS

· Profit before tax up 10.9% to £6.1m (H1 2017: £5.5m)

· Basic EPS of 13.51p (H1 2017: 11.70p)

· Net pledge book, including accrued interest increased by 8.6% to £47.8m (30 June 2017: £44.0m)

· Personal Loan book increased 78.0% to £17.8m (30 June 2017: £10.0m)

· Net debt increased to £16.8m (30 June 2017: £11.5m) due to personal loan and other working capital increases

· Interim dividend of 4.4p (2017 interim: 4.3p)

OPERATIONAL HIGHLIGHTS

· Growth in pawnbroking customer lending and new customers

· Development of our Expert Eye valuation system

· Enhancement of the est1897.co.uk website with typically more than 2,000 high-end watches and jewellery pieces now available online or through click-and-collect

· Growth of our personal loan product, in part driven by increasing numbers of customers being offered our lower APR products

Enquiries:

H&T Group plc 

Tel: 0870 9022 600

John Nichols, chief executive

Steve Fenerty, finance director

Numis Securities (broker and nominated adviser)

Tel: 020 7260 1000

Mark Lander, corporate broking

Freddie Barnfield, nominated adviser

Haggie Partners (financial public relations)

Tel: 020 7562 4444

Damian Beeley

Sarah Shephard

Chanice Smith

INTERIM REPORT

Introduction

We have continued to achieve growth from all core revenue streams because of our ongoing focus on in-store execution excellence alongside our continuing development in digital technology. Bringing together enhanced digital offerings with our 182 stores is key.

The trading environment has become more challenging with high street footfall reductions and localised competitor activity. 

We increased our store estate via an acquisition of a single site business and continue to offer high-end lending through our office in Bond Street, London.

IFRS 9

These statements have been prepared under IFRS 9 'Financial instruments', with prior periods restated. IFRS 9 introduced an expected loss model where impairment is recognised on initial recognition of a personal loan or pledge based on the probability and timing of default together with the expected loss. The impact on H1 2017 and H1 2018 results is summarised below.

We have placed comparatives on the H&T website at https://handt.co.uk/about/investor-relations/reports/announcements which explains the differences in accounting treatments between IAS 39 and IFRS 9 with the effect on full year 2017 as well as H1 2017 and H1 2018. 

FINANCIAL RESULTS

The Group has reported profit before tax of £6.1m (H1 2017: £5.5m), a 10.9% increase, reflecting a good operational performance. 

Gross profit increased by £5.4m, 14.5%, to £42.6m (H1 2017: £37.2m). The average H1 2018 gold price has decreased 2.6% to £958 per troy ounce for H1 2018 (H1 2017: £984).

Total direct and administrative expenses increased by £4.6m, 14.6%, to £36.1m (H1 2017: £31.5m). Of this increase, £2.1m relates to additional loan impairment charges, due to the change in IFRS 9 accounting treatment, and in line with the growth in the personal loan book. There has been £1.2m of cost increases because of store staff investment including the adoption of the living wage and increased London salary weighting and higher store operating costs, including higher utility costs and cash delivery expenditures. £0.6m of the uplift is associated with additional staffing and marketing costs associated with the personal loans growth. There has been £0.4m of one-off costs associated with staff settlement and recruitment fees and an increase of £0.3m in central staff costs.

The Group's balance sheet remains strong with net debt at £16.8m (30 June 2016: £11.5m) and a net debt to EBITDA ratio, calculated in accordance with bank covenant arrangements, of 0.97x (30 June 2017: 0.75x). The increased borrowings have principally been invested into working capital of the business, including growth of the personal loan book. The bank debt position is well within the covenant test of 3.0x. The Group has £9.0m of headroom available on its debt facility of £35.0m at 30 June 2018. We do not anticipate this position materially changing by year end.

Dividend

The Board has approved an interim dividend of 4.4 pence (2017 interim: 4.3 pence). This will be payable on 5 October 2018 to all shareholders on the register at the close of business on 7 September 2018.

REVIEW OF OPERATIONS

Pawnbroking

Pawnbroking remains a core product for H&T and we are pleased to report that the gross pledge book increased to £47.8m, including accrued interest, (30 June 2017: £44.0m). This growth has been achieved because of the following factors:

· A consistently high redemption rate of 84%

· The continued growth in customer lending sourced via our appointed introducers and online marketing activity has increased our new customer count

· Our average number of customer visits has increased

· The quality-watch segment of the book has improved with the support of the Expert Eye system and additional specialist valuation staff which has driven a 25% increase in this category of lending

Pawnbroking revenue less impairment increased £1.7m to £16.2m (H1 2017: £14.5m) resulting in an annualised risk-adjusted margin (RAM) of 67.6% (H1 2017: 66.5%). 

Pawnbroking summary:

Pawnbroking scrap

Pawnbroking scrap produced gross profits of £1.0m (H1 2017: £1.2m) for the half year, on sales of £8.0m (H1 2017: £5.9m). The reduced margin from 20% to 13% is a result of the reduction in the gold price between H1 2017 and H1 2018. 

Retail

Retail sales increased 7.2% to £16.4m (H1 2017: £15.3m) and gross profits increased by 1.7% to £6.0m (H1 2017: £5.9m). Margin at 36.6% (H1 2017: 38.6%) reflects an increased proportion of new items to supplement unredeemed pledge stock.

Improvements have been made to both our www.handt.co.uk and www.est1897.co.uk websites. We typically hold more than 2,000 high-end pre-owned watches and jewellery items on our website, available online via our own websites and www.chrono24.co.uk.

Further enhancements to our www.est1897.co.uk and to our Customer Relationship Management system are planned for H2 2018 as we ensure that the customer experience is as good as it can be.

Personal Loans

Net revenue increased 72.2% to £3.1m (H1 2017: £1.8m), and the loan book increased 79.1% to £17.8m (30 June 2017: £10.0m). The principal factor in the loan book growth has been the continuing development of the store business, supplemented by online and broker-to-store third-party relationships.

We have made progress in delivery of the longer-term strategy of helping our customers to rebuild their credit rating, with more customers obtaining access to one of the two lower interest rate and longer-term products launched in 2017. As a result, the proportion of loans that fall under the definition of high-cost short-term credit in H1 2018 fell to 50% (H1 2017 71%).

The proportionate growth in the loan book, with the average monthly net book having doubled on H1 2017, is higher than revenue growth. We do not anticipate this level of book growth to continue. The reduction in the annualised risk-adjusted margin to 37% (H1 2017: 44%) is the result of the increased proportion of new customers and repeat customers being offered our lower APR products. Returns and default levels are in line with management expectations for credit quality and collections performance. 

Organic traffic to our website www.handt.co.uk continues to increase and we believe having a direct online loan offering and the ability to direct applicants from online into store is an important part of our growth strategy. The online loan book has increased from £0.9m to £1.1m since 30 June 2017 as we take a measured and prudent approach to our online lending scorecard.

Store lending remains the key driver for revenue growth, with the book having increased 85% since 30 June 2017.

We have continued to invest in our Customer Relations Management system so that we can more effectively engage with and redirect online and via broker loan enquiries to local branches where appropriate. The process of encouraging a potential customer from the website to a physical branch is an important component of our strategy, blending a digital offering with our store estate.

Personal Loans summary:

Gold purchasing

Gold purchasing profits increased to £2.1m (H1 2017: £1.8m). The additional profit was mainly the result of increased volumes of gold scrapped, up 29.3% to £10.6m (H1 2017: £8.2m).

Typically, the impact of a decrease in gold price to purchasing profits is relatively short lived. There is a delay between purchasing gold in store and realising the value through the market; if the gold price falls during this period then margins are reduced. As the gold price stabilises, the rate that is paid for gold in store increases and we return to normal margins.

Other services

Total revenues from other services increased to £2.8m (H1 2017: £2.7m) with a £0.3m increase in Foreign Currency (FX) transaction profit offset by reductions in cheque cashing and Western Union income.

FX profit increased by 23% to £1.6m while the value of currency traded increased by 30%. This is a result of our strategy to ensure our rates remain competitive as we continue to raise customer awareness in the product. The product is relatively new to the business and we continue to optimise currency holdings in store, develop additional services such as the buy-back guarantee and improve customer awareness through development of marketing and point-of-sale materials, including digital boards. We have recently extended our online FX click-and-collect capability.

Buyback gross profits were flat at £0.8m. Customer transactions were down 19.5% on H1 2017, but the testing processes implemented during 2017 and reduction in the types of items we will accept has meant we are achieving improved value from disposition.

REGULATION

Assessing creditworthiness in consumer credit

In July 2017, the FCA published its consultation paper on changes to its rules and guidance on assessing creditworthiness in consumer credit. In particular they want to clarify:

· the distinction between affordability and credit risk

· the factors that should be used when deciding the proportionality of assessments

· the role of income and expenditure information

· the regulator's expectations around firms' policies and procedures

We have designed our Personal Loan policies and procedures to include a robust assessment both of affordability and creditworthiness, so we are well placed to ensure our compliance with the final policy statement from the FCA.

Our strategy to evolve the Personal Loans product to lower interest rates allows existing customers to move away from high-cost credit where possible. Ensuring that we adequately assess creditworthiness and affordability and customers are provided with loans they can afford is in the best interests of our customers and is a more sustainable product for our business.

STRATEGY AND OUTLOOK

The demand for small-sum, short-term cash loans remains strong. The Company continues to focus and seek strategies to grow its pawnbroking offering while expanding its unsecured lending product and retail offering by focusing on digital and online strategies to complement its store estate. 

We will continue to work towards our vision of helping our customers to rebuild their credit history by expanding the proportion of them on products that falls outside high cost short term lending. We will achieve this by continuing to focus on operational effectiveness aligned with the training, development and progression of our valuable staff.

Current trading is in line with management's expectations.

Interim Condensed Financial Statements

Unaudited statement of comprehensive income

For the 6 months ended 30 June 2018

All results derive from continuing operations.

*IFRS 9 restated

Unaudited condensed consolidated statement of changes in equity

For the 6 months ended 30 June 2018

Unaudited condensed consolidated balance sheet

At 30 June 2018

Unaudited condensed consolidated cash flow statement

For the 6 months ended 30 June 2018

Unaudited notes to the condensed interim financial statements

For the 6 months ended 30 June 2018

Note 1 Basis of preparation

The interim financial statements of the group for the six months ended 30 June 2018, which are unaudited, have been prepared in accordance with the International Financial Reporting Standards ('IFRS') accounting policies adopted by the group and set out in the annual report and accounts for the year ended 31 December 2017, except for the adoption of IFRS 9. The group does not anticipate any change in these accounting policies for the year ended 31 December 2018. As permitted, this interim report has been prepared in accordance with the AIM rules but not in accordance with IAS 34 "Interim financial reporting". While the financial figures included in this preliminary interim earnings announcement have been computed in accordance with IFRSs applicable to interim periods, this announcement does not contain sufficient information to constitute an interim financial report as that term is defined in IFRSs.

The financial information contained in the interim report also does not constitute statutory accounts for the purposes of section 434 of the Companies Act 2006. The financial information for the year ended 31 December 2017, prior to the restatement as a result of the adoption of IFRS 9, is based on the the statutory accounts for the year ended 31 December 2017. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

After conducting a further review of the group's forecasts of earnings and cash over the next twelve months and after making appropriate enquiries as considered necessary, the directors have a reasonable expectation that the company and 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 half yearly condensed financial statements.

Unaudited notes to the condensed interim financial statements

For the 6 months ended 30 June 2018

Note 2 Segmental Reporting

Unaudited notes to the condensed interim financial statements (continued)

For the 6 months ended 30 June 2018

Note 2 Segmental Reporting (continued)

Note 3 Operating profit and EBITDA

EBITDA

The Board consider EBITDA to be a key performance measure as the Group borrowing facility includes a number of loan covenants based on it.

EBITDA is defined as Earnings Before Interest, Taxation, Depreciation and Amortisation. It is calculated by adding back depreciation and amortisation to the operating profit as follows:

Unaudited notes to the condensed inter im financial statements (continued)

For the 6 months ended 30 June 2018

Note 4 Borrowings

Note 5 Finance costs

Unaudited notes to the condensed interim financial statements (continued)

For the 6 months ended 30 June 2018

Note 6 Tax on profit

The taxation charge for the 6 months ended 30 June 2018 has been calculated by reference to the expected effective corporation tax and deferred tax rates for the full financial year to end on 31 December 2018. The underlying effective full year tax charge is estimated to be 19% (six months ended 30 June 2017: 19.25%).

Note 7 Earnings per share

Basic earnings per share is calculated by dividing the profit for the period attributable to equity shareholders by the weighted average number of ordinary shares in issue during the period.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. With respect to the group these represent share options granted to employees where the exercise price is less than the average market price of the company's ordinary shares during the period.

Reconciliations of the earnings per ordinary share and weighted average number of shares used in the calculations are set out below:

Unaudited notes to the condensed interim financial statements (continued)

For the 6 months ended 30 June 2018

Note 8 Share capital

Note 9 Dividends

On 9 August 2018, the directors approved a 4.4 pence interim dividend (30 June 2017: 4.3 pence) which equates to a dividend payment of £1,657,000 (30 June 2017: £1,600,000). The dividend will be paid on 5 October 2018 to shareholders on the share register at the close of business on 7 September 2018 and has not been provided for in the 2018 interim results. The shares will be marked ex-dividend on 6 September 2018.

On 3 May 2018, the shareholders approved the payment of a 6.2 pence final dividend for 2017 which equates to a dividend payment of £2,329,000 (2016: £1,964,000). The dividend was paid on 1 June 2018.