H&t Group Plc Regulatory News (HAT)

Preliminary results

for the year ended 31 December 2017

H&T Group ("H&T" or the "Group") is pleased to announce its preliminary results for the year ended

31 December 2017.

John Nichols, chief executive of H&T Group, said:

"This has been a milestone year for H&T. We have produced a strong trading performance which is due in no small part to the initiatives which we have implemented over the past few years. We have sought to refine our core operations to ensure that they produce the best possible results, while developing our credit and online propositions. I am pleased that the impact of these efforts is borne out in today's results.

"Personal loans and our est1897.co.uk online jewellery sales are particular highlights, and there is significant scope to continue to grow these aspects of the business. Over the past few years our marketplace has changed dramatically. We have adapted to this new environment, investing heavily in our staff, diversifying our product suite, building out our online proposition and realigning aspects of our business to reflect our customer base. We have also reduced our exposure to gold price volatility. Challenges remain, but we can look to the future with growing confidence."

* This is the actual percentage of lending in each year which was redeemed or renewed, the 2017 figure is an estimate based on recent trend and early performance.

Preliminary results

for the year ended 31 December 2017

Operational highlights:

· Personal loans grew with the net loan book increasing 94.7% from £9.4m to £18.3m

· Gross pledge book increased 11.6% to £46.1m (2016: £41.3m)

· We increased both the concession format and lending on high-value watches for pawnbroking

· The est1897.co.uk retail website has been significantly improved and expanded to include more than 2,000 high-value watches, now available to buy direct or via click-and-collect

· We launched our lowest rate personal loan product in May 2017

Enquiries:

H&T Group plc

Tel: 020 8225 2797John Nichols, Chief ExecutiveSteve Fenerty, Finance Director

Numis Securities (Broker and Nominated Adviser)

Tel: 020 7260 1000

Freddie Barnfield - Nominated Adviser

Mark Lander - Corporate Broking

Haggie Partners (Public Relations)

Tel: 020 7562 4444

Damian Beeley

Brian Norris

Chairman's statement

The Group has achieved growth in revenues from the core services of pawnbroking, retail and personal loans. We have improved store profitability and have also made progress in the development of our online channel although there is still considerable work to do.

Our est1897.co.uk site for watches is a great example of how we can successfully use the internet for retailing backed up by our store network. The opportunity to build on this concept for our core services is clear and will be a key part of our future strategy.

These activities have repositioned the business within the wider alternative credit market and allowed the Group to access a broader customer base. The Board ensures that this growth is carefully managed with a clear focus on the changing risks, both regulatory and financial, that this diversification brings.

The growth in retail, FX and buyback also provide a degree of resilience to changes in the marketplace

Financial Performance

The Group delivered profit after tax of £11.3m (2016: £7.6m) and diluted earnings per share of 30.94 pence (2016: 20.88 pence). Subject to shareholder approval, a final dividend of 6.2 pence per ordinary share (2016: 5.3 pence) will be paid on 1 June 2018 to those shareholders on the register at the close of business on 4 May 2018. This will bring the full year dividend to 10.5 pence per ordinary share (2016: 9.2 pence).

The Group's financial position is strong with growth in the combined personal loan and pawnbroking loan books (net) to £63.8m (31 December 2016: £50.2m), as a result net debt increased to £13.3m at 31 December 2017 (31 December 2016: £5.4m).

At year end the Group had available headroom of £8.0m on its £30m borrowing facilities. I am pleased to report that in March 2018 the facility was increased by £5.0m.

Regulation

H&T is authorised and regulated by the Financial Conduct Authority (FCA) for all consumer credit business. During the year the FCA conducted a consultation on creditworthiness and is expected to publish the results in 2018.

We engaged with the FCA through our trade associations and have analysed the proposals contained within the consultation. The consultation provides helpful guidance on effective creditworthiness assessments and clarifies some of the specific exemptions in relation to pawnbroking. Subject to the final policy statement we do not expect it to have an adverse impact on our business. We fully support the higher standards that the consultation aims to deliver.  

Strategy

We are developing our capabilities to address a changing market where we see pressures both on the high street in general and the core product of pawnbroking in particular. We are focussed on maximising the potential from the core services while investing in the development of new products and channels. This approach will allow us to improve profitability in the short term; in the longer term we can access a wider customer base and provide those consumers with products appropriate to their needs.

We believe that our network of stores supports this development, whether through click-and-collect from the est1897 website or by providing a face-to-face underwriting decision for customers we cannot serve with an online loan. This real-world presence supported by an effective online and mobile proposition creates an important distinction between H&T and a purely online business.

In developing our personal loan product, we have a clear objective to provide our customers with a route to lower interest rate credit products as their relationship with H&T develops. We believe that this progression is beneficial to the customer, builds loyalty and meets the high standards required in this regulated marketplace.

Prospects

The overall weakness in sterling following the EU referendum result has continued to benefit the sterling gold price for much of the year, this in turn provides an improvement in the Group's profits while it continues. Demand for our services remains strong and the development in our products and distribution enables us to capture a larger share of the significant alternative credit market.

Our thoughtful approach to growth reflects our intention to provide our consumers with a service that maintains the highest standards of affordability and seeks to avoid any consumer detriment.

On behalf of the Board and our shareholders, I would like to thank everyone at H&T for their hard work and dedication over the past year.

Peter D McNamara

Chairman

Chief executive's review

INTRODUCTION

The Group has produced a strong trading performance and made good progress in its strategic development. Our intention is to get the best possible result from our core operations, develop a range of additional credit products and expand the online channel. We have delivered against all of those objectives in the past year.

The Group delivered profit before tax of £14.1m (2016: £9.7m) as a result of improved gross profits in the key segments of pawnbroking, retail and personal loans.

THE MARKET

Our marketplace has undergone significant changes in the past four years, experiencing peak competition, a falling gold price and new regulation causing a number of our competitors to restructure their businesses or exit the market. In comparison, during 2017 we experienced far more stability allowing us to focus on developing our proposition.

OUR STRATEGY

The Group's strategy is to serve a customer base whose access to mainstream credit is limited and for whom small-sum loans can help to address short-term financial challenges. The Group will continue to deliver this strategy by developing a range of lending products, both secured and unsecured, offered in store and online. In expanding our credit products we aim to genuinely help our customers and have updated our vision statement to reinforce that vital message within the business.

The development of a diversified suite of services including retail, buyback and FX, improves returns and reduces the Group's exposure to gold price volatility.

We continue to innovate and explore how to interact most effectively with our customers through the development of introducer channels, our online capability and our brand. This development is supported by our stores that provides our online customer with the opportunity to speak to a trained member of staff face to face or to collect an item that they reserved online.

REVIEW OF OPERATIONS

Pawnbroking

Gross profits from pawnbroking increased 4.5% to £29.7m (2016: £28.4m) and the gross pledge book increased 11.6% to £46.1m (31 December 2016: £41.3m) as a result of the higher gold price, the concession format and an increase in loans on quality watches.

The risk-adjusted margin (Revenue as a percentage of the average net pledge book) was 68.3% (2016: 72.5%). The reduction in risk-adjusted margin is a result of the changing business mix to higher value,  lower interest rate loans. Redemption of annual lending was marginally lower at an estimated 83.6% for lending in 2017 (2016 actual: 84.3%).

The pawnbroking segment remains challenging with limited real growth in like-for-like stores. There is short-term opportunity as a result of the relatively higher gold price and in the medium term through further expansion in our concession format and lending on high-end products.

The Group has benefitted from the expertise provided by the Expert Eye service. This allows high quality images of assets in store to be assessed by our team of experts which in turn improves both the quality of decisions made and extends the range of assets on which we can lend. This has assisted the development of watch and diamond lending during the year.

The Group is investing in software to assist the management of customer enquiries in respect of pawnbroking as well as the acquisition of new partners to introduce customers to the business. This investment will allow an expansion to the broker and online channels in respect of pawnbroking during 2018.

Pawnbroking summary:

Notes to table

1 - Revenue as a percentage of the average net pledge book

Retail

Retail sales increased 16% to £35.4m (2016: £30.5m), gross profits to £12.9m (2016: £11.2m) and margin reduced to 36.3% (2016: 36.8%).

The Group has invested in store inventories with average monthly balances being 12% higher during 2017 than 2016. This coupled with control over targeted discounts has resulted in the significant improvements in gross profits despite margin pressure as a result of increased cost of goods reflecting the higher rates on both lending and purchasing activities.  

The development of new-jewellery sales has been particularly encouraging with sales increasing by 62% and gross profits of £1.3m (2016: £0.9m) as we identify key segments and lines to supplement our pre-owned offering.

The est1897 website has been enhanced during the year with improved templates, photography and the number of items on the site. There are now more than 2000 high-quality watches online together with a range of high-quality jewellery. This enables us to present store inventories to a far wider audience and equally, through the use of tablets, we can present a far wider range of choice to in-store customers. While in the early stages of development we are encouraged by the results to date with almost £1m in sales originating on the website being completed during 2017 (2016: £0.1m).

We intend to enhance the website further during 2018 with greater integration with in-store systems, additional products online and improved functionality for the user.

Personal Loans

The net personal loans book has increased by 94.7% to £18.3m (31 December 2016: £9.4m). The Board considers revenue less impairment to be an important measure of the performance of personal loans as it represents the net profit derived directly from our lending activities. Revenue less impairment has increased to £5.7m (2016: £3.5m) as a result of increased customer numbers and the expansion in our longer term, lower interest rate loan product.

The reduction in the risk-adjusted margin (RAM) to 44.9% (2016: 55.1%) is the result of the increased proportion of new customers, expansion in online and the introduction of our lower APR products. Impairment as a percentage of the average monthly net loan book has improved to 33.3% (2016: 37.0%) reflecting the increased mix of lower yield, higher quality loans. This is in line with management expectations for credit quality and collections performance.

In line with the strategy of providing larger loans over longer terms at a lower interest rate we launched our 49.9% APR product in May 2017. This product is designed to provide a "near prime" option for our best customers.

The group now has three distinct products offered both in store and online:

· >100% APR loans falling into the high-cost short-term credit (HCSTC) definition of the FCA. These loans are intended as the starting point of the customer journey with H&T and represent the highest volume of loans written as they tend to be lower value and shorter term. At 31 December 2017 this segment represented approximately 50% of the personal loan book.

·

·

As a result of these initiatives half of the personal loans loan book is now non-HCSTC.

The expansion in other channels of business continues, the net online loan book doubled in the year to £1.4m and remains a key opportunity for the Group. The broker to store channel is also beginning to show positive results as we enhance our customer relationship management systems.

The focus for the Group is to build these alternative sources for customers, work is underway to reduce the costs of acquisition and processing whilst improving performance.

Personal Loans summary:

Notes to table

1 - Revenue as a percentage of average loan book

2 - Revenue less impairment as a percentage of average loan book

Pawnbroking scrap

Gross profits reduced to £1.9m (2016: £2.1m). The result in 2016 was enhanced as a result of the rapid increase in the sterling gold price following the EU referendum result.

The average gold price during 2017 was £976 per troy ounce (2016: £926), a 5.4% increase. The gold price directly impacts the revenue received on the sales of scrapped gold.

Gold purchasing

Gross profits reduced to £3.4m (2016: £3.9m) despite a higher volume of gold scrapped in the year.

H&T purchases gold to achieve a particular margin and it takes around two months to process items directly to scrap. If the gold price increases during this processing period then our margins are enhanced, if it reduces then our margins are compressed.

During 2016, the gold price increased by 29% from January to December, whereas during the same period in 2017 it fell by 2.2%. Accordingly, our margins were considerably lower in 2017 vs 2016.

We estimate that the weight of fine gold purchased in 2017 increased by approximately 2.1% from 2016 to 2017.

Other services

Other services principally comprises FX, buyback, cheque cashing and Western Union. Gross profits from this segment increased by £0.3m to £5.9m (2016: £5.6m), as growth in FX and buyback was partially offset by declines in Western Union and cheque cashing.

The key growth components of FX and buyback improved in the year with gross profits from FX increasing to £2.9m (2016: £2.7m) and buyback increasing to £1.8m (2016: £1.6m).

FX is a simple transactional product which attracts a new customer base to the business. Improvements to currency holdings in store, point of sale materials and the expansion of click and collect will enhance this product in the future.

Buyback enables the Group to service a customer base who may not have appropriate assets for a pawnbroking loan. The principal assets purchased are mobile phones, tablets and games consoles. We have invested in system development to support the valuation and testing of the items in store. Further work will be completed in 2018 to fully integrate those systems and support the clicks-to-bricks customer journey.

PROSPECTS

The Group has enhanced its ability to serve a wider customer base, both in store and online, with growth in its well-established core products and the newer unsecured lending offering. This diversified approach to growth reduces the risks inherent in any individual objective and positions the Group to capture share in this exciting market. Current trading for 2018 is in line with management expectations.

I would also like to add my great thanks to those of the Chairman, in recognising all of our people whose skills, commitment and enthusiasm continue to drive our success, and who give us confidence in the future.

John G Nichols

Chief Executive

Finance Director's Review

FINANCIAL RESULTS

For the year ended 31 December 2017 gross profit increased 11.7% from £57.1m to £63.8m driven by growth in the core segments of pawnbroking, retail and personal loans.

Total direct and administrative expenses increased by 4.7% from £46.9m to £49.1m, principally as a result of investment in staff to support business volumes in Personal Loans and new initiatives. The Board considers the continued investment in people and systems to be vital in repositioning the business to take advantage of the market conditions.

Finance costs increased 20% to £0.6m (2016: £0.5m), reflecting the higher utilisation of the facility during 2017 following expansion in the pawnbroking and personal loan books.

Profit before tax increased by £4.4m to £14.1m, up 45.4% from £9.7m in 2016.

CASH FLOW

The growth in profit for the year resulted in an increase in operating cash flows before movements in working capital of 26.5% to £17.2m (2016: £13.6m).

The Group accelerated the growth both in personal loans and pawnbroking during 2017 resulting in an increase in receivables of £14.2m in the year (2016: £8.2m). This growth, partially offset by increased profits, is the principal reason the Group produced a cash outflow from operating activities of £2.4m (2016: inflow of £1.3m).

BALANCE SHEET

As at 31 December 2017, the Group had net assets of £107.6m (2016: £98.8m) with year-end net debt of £13.3m (2016: £5.4m) delivering an increase in gearing to 12.4% (2016: 5.5%).

On 1 March 2018, the Group extended the existing facility with Lloyds Bank plc by £5m allowing for maximum borrowings of £35.0m, subject to covenants, at a margin of between 1.75% and 2.75% above LIBOR. At year end £22.0m was drawn on the facility and the Group was well within the covenants with a net debt to EBITDA ratio of 0.76x and an EBITDA to interest ratio of 37.15. The facility has a termination date of 30 April 2020.

The combination of low gearing and a secure long-term credit facility provides the Group with the ability to make selective investments in the future while maintaining appropriate headroom.

INVESTMENTS AND DISPOSALS

The Group acquired two pawnbroking loan books for £0.1m, there have been no disposals of stores or loan books during the year.

IMPAIRMENT REVIEW

The Group performs an annual review of the expected earnings of each acquired store and considers whether the associated goodwill and other property, plant and equipment are impaired. There was no impairment charge during 2017 (2016: £nil/none).

SHARE PRICE AND EPS

At 31 December 2017, the share price was 335p (2016: 259.75p) and market capitalisation was £124.6m (2016: £95.5m). Basic earnings per share were 31.07p (2016: 20.94p), diluted earnings per share were 30.94p (2016: 20.88p).

Stephen A Fenerty

Finance Director

Group statement of comprehensive income

For the year ended 31 December 2017

(*) see note 1 Revenue Recognition

Group statement of changes in equity

For the year ended 31 December 2017

Group balance sheet

As at 31 December 2017

Group cash flow statement

For the year ended 31 December 2017

Notes to the preliminary announcement

For the year ended 31 December 2017

1. Finance information and basis of preparation

The financial information has been abridged from the audited financial statements for the year ended 31 December 2017.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2017 or 2016, but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 will be filed with the Registrar in due course. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006 or equivalent preceding legislation.

Whilst the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards (as adopted for use in the EU) ('IFRS'), this announcement does not itself contain sufficient information to comply with IFRS. The Group will be publishing full financial statements that comply with IFRS in April 2018.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services and interest income provided in the normal course of business, net of discounts, VAT and other sales-related taxes.

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

· Pawnbroking, or Pawn Service Charge (PSC), comprises interest on pledge book loans, plus auction profit and loss, less any auction commissions payable and less surplus payable to the customer. Interest receivable on loans is recognised as interest accrues by reference to the principal outstanding and the effective interest rate applicable, which is the rate that discounts the estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount;

· Retail comprises revenue from retail jewellery sales, with inventory sourced from unredeemed pawn loans, newly purchased inventory and inventory refurbished from the Group's gold purchasing operation. All revenue is recognised at the point of sale;

· Pawnbroking scrap and Gold Purchasing comprises proceeds from gold scrap sales and is recognised on full receipt of sale proceeds;

· Personal loans comprises income from the Company unsecured lending activities. Personal loan revenues have historically been recognised net of related impairment charges. In light of the growth of the personal loans segment the Group has changed the personal loan revenue recognition policy to better reflect the underlying nature and substance of such revenues. From 1 January 2017 onwards, revenue has been stated before impairment, with any impairment charge shown on a separate line in the Group statement of comprehensive income. 2016 revenue, gross profit and other direct expenses have been restated. The revenue and other direct expenses as previously stated have been increased by £2,351,000. There have been no changes to previously reported operating profit, profit before tax, profit after tax, earnings per share; nor any change to the Group balance sheet or the Group cash flow statement; and

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

1. Finance information and basis of preparation (continued)

Revenue recognition (continued)

· Other services comprise revenues from third party cheque cashing, foreign exchange income, buyback and other income. The commission receivable on cheque cashing is recognised at the time of the transaction. Buyback revenue is recognised at the point of sale of the item back to the customer. Foreign exchange income represents the margin when selling or buying foreign currencies and is recognised at the point of sale. Any other revenues are recognised on an accruals basis.

The Group recognises interest income arising on secured and unsecured lending within trading revenue rather than investment revenue on the basis that this represents most accurately the business activities of the Group.

Inventories provisioning

Where necessary provision is made for obsolete, slow moving and damaged inventory or inventory shrinkage. The provision for obsolete, slow moving and damaged inventory represents the difference between the cost of the inventory and its market value. The inventory shrinkage provision is based on an estimate of the inventory missing at the reporting date using historical shrinkage experience.

Impairment of goodwill and other intangibles

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The review is conducted annually, in the final quarter of the year. The impairment review is conducted at the level of each cash generating unit, which for acquisitions represents the specific store or stores acquired.

There was no impairment loss recorded in the current year (2016: £nil). The principal assumptions applied by management in arriving at the value in use of each cash generating unit are as follows:

The Group prepares cash flow forecasts over a five-year period for each cash generating unit. Forecast EBITDA (used as a proxy for cashflows) has been derived by applying the Board approved base budget assumption to each individual stores' results for the twelve months to September 2017. For impairment review purposes, we have used conservative growth assumptions after 2018, even in this scenario there is still significant headroom on each CGU. A perpetuity formula has been applied to the cashflows i.e. we have made the assumption that periodic cashflows will be received indefinitely. The Group has discounted the cash flows at a pre-tax, risk adjusted rate of 12% (2016: 9%).

While the impairment review has been conducted based on the best available estimates at the impairment review date, the Group notes that actual events may vary from management expectation.

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

2. Operating segments

Business segments

For reporting purposes, the Group is currently organised into six segments - pawnbroking, gold purchasing, retail, pawnbroking scrap, personal loans and other services.

The principal activities by segment are as follows:

Pawnbroking: 

Pawnbroking is a loan secured against a collateral (the pledge). In the case of the Group, over 99% of the collateral against which amounts are lent comprises precious metals (predominantly gold), diamonds and watches. The pawnbroking contract is a six-month credit agreement bearing a monthly interest rate of between 1.99% and 10.00%. The contract is governed by the terms of the Consumer Credit Act 2008 (previously the Consumer Credit Act 2002). If the customer does not redeem the goods by repaying the secured loan before the end of the contract, the Group is required to dispose of the goods either through public auctions if the value of the pledge is over £75 (disposal proceeds being reported in this segment) or, if the value of the pledge is £75 or under, through public auctions or the Retail or Pawnbroking Scrap activities of the Group.

Purchasing: 

Jewellery is bought direct from customers through all of the Group's stores. The transaction is simple with the store agreeing a price with the customer and purchasing the goods for cash on the spot. Gold purchasing revenues comprise proceeds from scrap sales on goods sourced from the Group's purchasing operations.

Retail: 

The Group's retail proposition is primarily gold and jewellery and the majority of the retail sales are forfeited items from the pawnbroking pledge book or refurbished items from the Group's gold purchasing operations. The retail offering is complemented with a small amount of new or second-hand jewellery purchased from third parties by the Group.

Pawnbroking scrap: 

Pawnbroking scrap comprises all other proceeds from gold scrap sales other than those reported within Gold Purchasing. The items are either damaged beyond repair, are slow moving or surplus to the Group's requirements, and are smelted and sold at the current gold spot price less a small commission.

Personal loans: 

Personal loans comprises income from the Company unsecured lending activities. Personal loan revenues have historically been recognised net of related impairment charges. In light of the growth of the personal loans segment the Group has opted to change the personal loan revenue recognition policy to better reflect the underlying nature and substance of such revenues. From 1 January 2017 onwards, revenue has been stated before impairment, with any impairment charge included within other direct expenses in the group statement of comprehensive income. 2016 revenue, gross profit and other direct expenses have been restated accordingly. There have been no changes to previously reported operating profit, profit before tax, profit after tax, earnings per share; nor any change to the group balance sheet or group cash flow statement.

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

2. Operating segments (continued)

Other Services: 

This segment comprises:

· Third party cheque encashment which is the provision of cash in exchange for a cheque payable to our customer for a commission fee based on the face value of the cheque.

· Buyback which is a service where items are purchased from customers, typically high-end electronics, and may be bought back up to 31 days later for a fee.

· The foreign exchange currency service where the Group earns a margin when selling or buying foreign currencies.

· Western Union commission earned on the Group's money transfer service.

Cheque cashing is subject to bad debt risk which is reflected in the commissions and fees applied.

Further details on each activity are included in the chief executive's review.

Segment information about these businesses is presented below:

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

2. Operating segments (continued)

As disclosed in note 2, gross profit is stated after charging the direct costs of inventory items sold or scrapped in the period. Other operating expenses of the stores are included in other direct expenses. The Group is unable to meaningfully allocate the other direct expenses of operating the stores between segments as the activities are conducted from the same stores, utilising the same assets and staff. The Group is also unable to meaningfully allocate Group administrative expenses, or financing costs or income between the segments. Accordingly, the Group is unable to meaningfully disclose an allocation of items included in the consolidated statement of comprehensive income below gross profit, which represents the reported segment results.

The Group does not apply any inter-segment charges when items are transferred between the pawnbroking activity and the retail or pawnbroking scrap activities. 

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

2. Operating segments (continued)

(*) The Group cannot meaningfully allocate this information by segment due to the fact that all the segments operate from the same stores and the assets in use are common to all segments.

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

2. Operating segments (continued)

Geographical segments

The Group's revenue from external customers by geographical location are detailed below:

The Group's non-current assets are located entirely in the United Kingdom. Accordingly, no further geographical segments analysis is presented.

3. Finance costs

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

4. Tax charge on profit

(a) Tax on profit on ordinary activities

(b) Factors affecting the tax charge for the year

The tax assessed for the year is higher than that resulting from applying a blended standard rate of corporation tax in the UK of 19.25% (2016: 20%). The differences are explained below:

In addition to the amount charged to the income statement and in accordance with IAS 12, the excess of current and deferred tax over and above the relative related cumulative remuneration expense under IFRS 2 has been recognised directly in equity. This amounted released from equity in the current period of £96,000 (2016: charge of £56,000).

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

5. Earnings Per Share

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

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 and conditional shares granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year.

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

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

6. Notes to the Cash Flow Statement

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

Notes to the preliminary announcement (continued)

For the year ended 31 December 2017

7. Earnings before interest, tax, depreciation and amortisation ("EBITDA")

EBITDA

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:

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

8. Events after the balance sheet date

The directors have proposed a final dividend for the year ended 31 December 2017 of 6.2p (2016: 5.3p).

9. IFRS 9 Financial instruments

The Group will apply IFRS 9 from 1 January 2018. The Group plans to restate comparatives on initial application of IFRS 9. The full impact of adopting IFRS 9 on the Group's consolidated financial statements will depend on the financial instruments that the Group has during 2018 as well as on economic conditions and judgements made as at the year end. The Group has performed an assessment of potential impact of adopting IFRS 9 based on the financial instruments as at the date of initial application of IFRS 9 (1 January 2018).

Classification and measurement

With respect to the classification and measurement of financial assets, the number of categories of financial assets under IFRS 9 has been reduced compared to IAS 39. Under IFRS 9 the classification of financial assets is based both on the business model within which the asset is held and the contractual cash flow characteristics of the asset.

There will be no impact on the classification and measurement of the personal loans or pawnbroking trade receivables, both are measured on amortised cost.

There will be no change in the accounting for any financial liabilities.

9. IFRS 9 Financial instruments (continued)

Impairment

The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IAS 39. Under the impairment approach in IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date. Under IFRS 9 there will be a material increase in both revenue and impairment for Pawnbroking and Personal Loans.

In respect of the personal loan receivable the Group expects to recognise a loss allowance for 12-month expected credit losses where the loan is not in arrears, as the loan falls into arrears the loss allowance will be based on the lifetime expected credit losses as there has been a significant increase in credit risk. The Group's estimate of the loss allowance for these assets as at 1 January 2018 is £2.6m greater compared to IAS 39.

In respect of the pawnbroking loan receivable the short-term nature of the agreement results in 12-month expected credit losses being the same as lifetime expected credit losses. The Group's estimate of the loss allowance for these assets as at 1 January 2018 is £5.2m greater compared to IAS 39.

At the date of initial application of IFRS 9, the estimated impact is a decrease in receivables as at 1 January 2018 of £7.8m which, net of deferred tax, results in a reduction in net assets of £6.3m.