MCL.L Regulatory News (MCL)

4 October 2018

Morses Club PLC

Interim results for the twenty-six weeks ended 25 August 2018

STRONG FINANCIAL PERFORMANCE BASED ON CONTINUED HIGH-QUALITY LENDING

Morses Club PLC ("the Company" or "Morses Club"), the UK's second largest home collected credit ("HCC") lender, is pleased to announce its interim results for the twenty-six-week period ended 25 August 2018.

The Group's results are being reported under IFRS 9 'Financial Instruments' for the first time following the mandatory adoption of the standard for accounting periods commencing after 1 January 2018. As permitted by IFRS 9, comparative information for FY18 has not been restated.

In order to enable comparisons on a like for like, basis pro forma comparatives have been calculated on an IFRS9 basis, where appropriate, for KPIs and Alternative Performance Measures - full details of these can be found in the glossary.

Highlights

· Statutory revenue increased by 6.0% to £57.5m (H1 FY18: £54.2m2). On a like for like, pro forma basis, revenue was up 11.9% (H1 FY18 pro forma: £51.4m3)

· Net loan book growth over 12 months of 4.3% to £68.0m1 (H1 FY18: £65.2m2) on a like for like, pro forma basis, Net Loan Book growth was 8.4% (H1 FY18 pro forma: £62.8m3)

· Impairment as a percentage of revenue4 for the period was 21.9%1 (H1 FY18: 26.6%2, H1 FY18 pro forma: 21.5%3). On a like for like basis the percentage is consistent, meaning the change from H1 FY18 is in regard to the adoption of IFRS 9 rather than the performance of the loan book. 

· Customer numbers remain stable at 230,000 (H1 FY18: 233,000)

· 116 territory builds in the period (H1 FY18: 434), reflecting a return to more normalised levels as expected

· Cost / income ratio of 58.5%1,,4(H1 FY18: 56.5%2, H1 FY18 pro forma: 59.6%3 )

· 27,000 live Morses Club Cards issued, with loan balances of over £13.1m (H1 FY18: 11,100 live Morses Club Cards with loan balances of £4.6m)

· Adjusted4 profit before tax up 20.6% at £10.5m1 (H1 FY18: £8.7m2, H1 FY18 pro forma: £9.2m3); Statutory profit before tax up to £10.0m1 (H1 FY18: £6.7m2, H1 FY18 pro forma: £7.2m3)

· Adjusted4 EPS 6.6p1 (H1 FY18: 5.3p2, H1 FY18 pro forma: 5.7p3); Basic EPS 6.3p1 (H1 FY18: 3.9p2, H1 FY18 pro forma: 4.3p3)

· Interim dividend 2.6 pence per share1 an increase of 18.2% (H1 FY18: 2.2 pence per share2)

1 H1 FY19 numbers are reported under IFRS 9

2 H1 FY18 reported numbers are under IAS 39

3 H1 FY18 pro forma numbers have been adjusted to incorporate an estimate of IFRS 9 for comparability

4 Definitions are set out in the Glossary of Alternative Performance Measures

Key performance indicators

1 Definitions are set out in the Glossary of Alternative Performance Measures

2 KPI not quoted as it includes data points which precede the date of IFRS 9 transition

Paul Smith, Chief Executive Officer of Morses Club, commented:

"The success of last year's territory builds has been demonstrated in the first half of this financial year. Our focus on successful integration, the sustainable growth of the loan book and high-quality lending has resulted in a robust performance across all of our key financial metrics and delivered significant earnings growth for investors.

"We expect to benefit from further consolidation as regulatory changes force smaller players out of the market, along with the opportunity to broaden our customer base as we offer customers a greater choice of products to suit their needs going forward.

 "Whilst the traditional HCC product remains at our core, we continue to recognise that the needs of our customers are evolving, and we are making good progress in developing our digital offering, using our deep customer insights and advanced technology platform to create products that will add significant value for our customers.

"Our proven ability to successfully integrate territory builds and the progress we are making in developing new products for our customers gives us confidence in the outlook for the full year."

Forward looking statements

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". By their nature, forward-looking statements involve known and unknown risks and uncertainties since they relate to future events and circumstances. Actual results may, and often do, differ materially from any forward-looking statements.

Any forward-looking statements in this announcement reflect Morses Club's view with respect to future events as at the date of this announcement. Save as required by law or by the AIM Rules for Companies, Morses Club undertakes no obligation to publicly revise any forward-looking statements in this announcement following any change in its expectations or to reflect events or circumstances after the date of this announcement.

For further information please contact:

Note:

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

Analyst presentation

There will be an analyst presentation to discuss the results at 9.30 a.m. today at Panmure Gordon, 1 New Change, London, EC4M 9AF.

Those analysts wishing to attend are asked to contact Kimberley Taylor at Camarco on +44 (0) 20 3757 4999 or kimberley.taylor@camarco.co.uk. 

Notes to Editors

About Morses Club

Morses Club is the second largest UK Home Collected Credit (HCC) lender with 230,000 customers and 1,942 agents across 98 locations throughout the UK.

The Company offers a range of loan products to its customers through its extensive self-employed agent network. The majority of the Company's borrowers are repeat customers and the Company enjoys consistently high customer satisfaction with scores of 95% or above1.

The Company is using technology to broaden its offering and provide new products to ensure customers can access credit with the flexibility they require. In April 2016, its cashless lending product, the Morses Club Card, was introduced, enabling its customers to buy online as well as on the high street. Dot Dot Loans, the Company's first online instalment product, was launched in March 2017.

Morses Club successfully listed on AIM in May 2016.

About the UK non-standard credit market

The UK non-standard credit market, of which UK HCC is a subset, consists of both secured and unsecured lending and is estimated to comprise around 10 million consumers2.

Non-standard credit is the provision of secured and unsecured credit to consumers other than through mainstream lenders. Lenders providing non-standard credit principally lend on an unsecured basis and the market is characterised by high frequency borrowing.

Since February 2014, unsecured personal lending has grown from £161 billion to £209 billion in February 20183.

1 Independent Customer Satisfaction Survey conducted by Mustard

2 FCA High Cost Credit Review Technical Annex 1: CRA data analysis of UK personal debt - July 2017

3 Source: Table J Bank of England Money & Credit Report February 2018

About UK Home Collected Credit

UK HCC is considered to be a specialised segment of the broader UK non-standard credit market. UK HCC loans are typically small, unsecured cash loans delivered directly to customers' homes. Repayments are collected in person during weekly follow-up visits to customers' homes.

UK HCC is considered to be stable and well-established, with approximately 1.6 million2 people using the services of UK HCC lenders.

2 High Cost Credit Review ANNEX 1 - July 2017

Chief Executive's Statement

Performance

The first half of this year has seen continued strong progress, with revenue increasing by 6.0% to £57.5m (H1 FY18: £54.2m). On a like for like basis revenue increased by 11.9% (pro forma H1 FY18: £51.4m). Total credit issued rose by 4.6% to £86.1m (H1 FY18: £82.3m).

We achieved net loan book growth over 12 months of 4.4% (H1 FY18: 16.0%). On a like for like basis, net loan book growth was 8.4%. While the proportion of loans attributable to the highest tier of customers* was maintained, reflecting the continued focus on the quality of the loan book and the success of the investment in territory builds in FY18. Customer numbers remained stable at 230,000 (H1 FY18: 233,000), whilst impairments as a percentage of revenue on a like for like basis were consistent year on year. This reflects the positive impact of higher quality customers and our prudent approach to lending.

*High tier customers are those who have made more than 9 of the last 13 payments

Customer Numbers and Territory Builds

FY 2018 was a period of exceptional growth in customer numbers for Morses Club as we capitalised on a unique market opportunity to integrate a significantly higher number of territory builds than in a 'typical' year.

We applied stringent criteria to our selection of agents and the subsequent territory builds have resulted in high quality loan books and loyal customers. The territory builds have been successfully integrated into the business and their success is reflected in the proportion of loans attributable to the best paying customers.

A year on, these territory builds are now profitable and the cost of onboarding and integrating these territory builds has been fully incurred. We expect growth in the number of new territory builds to return to more normalised levels, and the decrease in associated costs to have a positive impact on earnings growth.

Growth of our Core HCC Business

Whilst the number of customers and the dynamics of the HCC sector remain stable, our loan book continues to grow as our agents expand the number of quality customers on their books, and customers who have moved across to Morses Club from other providers run down their loan balances with their previous lender and increase their borrowing with Morses Club.

Increasingly high regulatory standards are likely to make it ever more difficult for some HCC lenders to remain competitive, and we expect to see market consolidation as agents and customers of these businesses move to the larger, well established providers. Whilst this presents a compelling growth opportunity for our business, we will only acquire loan books that will be earnings accretive to our existing business.

Our customers value the face to face interaction with our agents and customer feedback has again shown that satisfaction levels are consistently at 95%1 and above, underlining the importance of retaining the highest quality agents.

In a competitive market where personal recommendations play an instrumental role in attracting new customers, we recognise the importance of ensuring good customer outcomes which remain at the heart of our business.

 1 Independent Customer Satisfaction Survey conducted by Mustard

Initiatives and Product Development

Whilst the traditional HCC product remains at our core, we recognise that the needs of our customers are evolving, and recent independent research has revealed that over 60% of our customers are interested in accessing associated e-money products through Morses Club.

Our advanced technology platform and deep customer insights have enabled us to develop our digital offering for existing customers and begin to create products relevant to a broader section of potential new customers who are increasingly looking to access more flexible products that address their lending needs.

Interest in our Morses Club Card, the only cashless lending product available in the mainstream HCC sector, continues to grow, with c.27,000 cards in circulation and loan balances of £13.1m (H1 FY18: c11,000, £4.6m), and we expect this momentum to continue.

In January 2018 we entered a test phase for our Customer Portal which enables our customers to access information regarding their account balance and payment history. We are now in the detailed planning phase for a wider roll-out in 2019.

We continue to refine our plans for Dot Dot Loans, our online instalment product, regarding the product range for this market sector.

Regulatory Update

We welcomed the conclusion of the FCA's high-cost short-term credit review in May and were pleased to see the FCA's broad conclusions regarding the sector.

We are committed to transparency and fair outcomes for all our customers, with forbearance embedded at the heart of our business model. As a fully FCA regulated lender, we aim to adhere to best practice guidelines in the areas the FCA is seeking responses. We do not envisage any significant financial or operational impact on our business when the draft rules are announced later this year.

Dividend

As a result of the strong earnings growth in the first half of the year, the Board is delighted to declare an interim dividend of 2.6p per share (H1 FY18: 2.2p).

The dividend of 2.6p per share will be paid on 19 January 2019 to ordinary shareholders on the register on 28 December 2018.

Outlook

The successful integration of last year's territory builds has delivered improvements to loan book quality and growth, and our conservative risk policy and focus on the sustainable growth of the business, has resulted in earnings growth.

We recognise opportunities for growth through both ongoing consolidation in our core HCC markets, as well as broadening our offering, and we continue to make good progress with our plans for new product development and diversification.

Trading is in line with the Directors' expectations and we remain confident in the outlook for the full year.

Paul SmithChief Executive OfficerDate: 4 October 2018 

Financial Review

 1 Metric not quoted as it includes data points which precede the date of IFRS 9 transition

1 Definitions are set out in the Glossary of Alternative Performance Measures

2 Costs incurred in relation to the company's IPO and AIM listing

3 Amortisation of acquired customer lists and agent networks

1 Definitions are set out in the Glossary of Alternative Performance Measures

Statutory profit before tax increased by 49.1% to £10.0m (FY18: £6.7m). Adjusted IFRS 9 profit before tax increased by 20.6% to £10.5m (FY18: £8.7m). This includes start-up losses in relation to Dot Dot Loans of £0.4m. The adjusted profit before tax excluding Dot Dot Loans and the investment cost of territory builds rose to £12.2m (FY18: 10.9m), reflecting an underlying increase of 11.9%.

Revenue for the twenty-six week period ended 25 August 2018 increased by 6.0% to £57.5m (H1 FY18: £54.2m). This was driven by a 4.6% increase in total credit issued to £86.1m (H1 FY18: £82.3m), largely related to territory builds. Customer numbers were broadly stable showing a small decrease of 1.3% to 230,000 (H1 FY18: 233,000). Customer numbers showed an increase of c1,000 since the year end 24 February 2018.

The total impairment charge decreased to £12.6m and as a ratio to revenue to 21.9% for the period (H1 FY18: 26.6%). This reduction is heavily impacted by the move from IAS39 to IFRS9 equally from a revenue and impairment perspective, with the current half year impairment on a similar IAS39 basis remaining unchanged at 26.6%. This remains within our IAS39 target range of 22.0% to 27.0% of revenue, a range based on more modest growth levels. The contribution from the loan book (Revenue less Impairment) demonstrated very good progress, increasing by 12.8% to £44.9m (H1 FY18: £39.8m) and compared to the pro forma IFRS9 numbers for last year by 11.4% (H1 FY18 pro forma: £40.3m). Year on year the gross loan book and the high quality customer balances both increased by 5.7% as we reach the top of the quality curve . Quality customer balances make up 69.1% of the total gross balances compared to just 56.2% four years ago. The average customer balance of £590 has increased by 7.5% from £549 twelve months ago as lending is gradually increased to high performing customers introduced through the territory builds in 2017. Customer indebtedness remains within conservative levels with 90% of loans made consuming no more than 25% of the customer's net disposable income (being net income less all living expenses and other debt repayments)  

Agent commission (excluding territory build subsidies) was up from £13.1m to £14.1m, an increase of 7.6% which was lower than the increase in cash collections of 12.2%. This reflects territory build costs decreasing significantly to £1.3m (H1 FY18: £1.9m) as subsidies to the peak new territories in July and August 2017 declined as they reached their 12 month anniversary. Agent subsidies represent an investment cost to establish quality agents and grow the customer numbers but as is typical in the industry we take the charge to the income statement as incurred. With territory build activity returning to more normalised levels, management would expect this number to continue to decline.

Administration expenses (excluding non-operating costs) increased to £19.5m from £17.5m, and represents 33.9% of income (H1 FY18: 32.4%). On a like for like IFRS 9 basis this compares to 34.1% for H1 FY18.

Exceptional costs were £nil for the period, (H1 FY18: £1.0m restructuring of employed agents).

IFRS 9

IFRS 9 'Financial instruments' was mandatory for the first time for the accounting period starting 25 February 2018 and replaces IAS 39 'Financial instruments: Recognition and measurement'. IFRS 9 significantly changes the recognition of impairment on customer receivables by introducing an expected loss (EL) model. Under the EL approach, impairment provisions are recognised on inception. This differs from the incurred loss model under IAS 39 where impairment provisions are only reflected when there is objective evidence of a credit-affecting event, such as a missed payment.

The resulting effect is that impairment provisions under IFRS 9 are recognised earlier. This has resulted in a one-off adjustment to receivables and reserves on adoption and results in the delayed recognition of profits. Distribution of profits are affected by the business' seasonality and will be lower in times of growth due to higher day 1 provisioning.

The group made an opening balance sheet adjustment of £2.8m at 25 February 2018 but will not restate its 2018 prior year comparatives as permitted by IFRS 9 in its statutory accounts. This is due to the IFRS 9 requirement in respect of the de-recognition of a financial asset which would require loans terminated prior to 25 February 2018 to remain under IAS 39 in the prior year.

The impact of this adjustment to the opening balance sheet as at 25 February 2018 was a reduction in the net loan book of 4.7%, well within the guidance issued at year end of a reduction between 4% to 6%.

Full details of the transitional adjustment can be found in the Notes to the Condensed Financial Statements.

Balance sheet

On a like for like IFRS 9 basis Net Assets increased by 12.5% to £65.9m (H1 FY18: £58.6m) and are also 8.0% higher than the Net Assets as measured under IAS 39 of £61.0m as at H1 FY18.

Regulatory Update

Morses Club has been operating under full Financial Conduct Authority ("FCA") authorisation since May 2017.

Funding

On 18 August 2017, the Company announced that it had increased its loan facility from £25.0m to £40.0m with the addition of a major high street bank alongside Shawbrook Bank. In the same announcement, the Company confirmed that the expiry of the facility had been extended from March 2019 to August 2020.

As at 25 August 2018, the Company had drawn £12.0m of this facility (26 August 17: £17.0m). The Directors expect this to increase during the second half of the year in the run-up to Christmas, which is the peak lending and therefore borrowing period.

Principal Risks and Uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Company's performance over the remaining 26 weeks of the financial year and could cause results to differ materially from expected and historical results. The Directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the 52 weeks ended 24 February 2018. These should be read in the context of the cautionary statement regarding forward looking statements at the beginning of these Interim Results. A detailed explanation of the risks summarised below, and how the Company seeks to mitigate the risks, can be found on page 26 of the annual report which can be found at www.morsesclubplc.com/investors/.

The Company's principal financial assets are loan book receivables, cash and other receivables.

Liquidity Risk

The Directors monitor liquidity closely. From August 2018 the Company has access to a £40.0m revolving asset based credit facility (H1 FY18: £40.0m), which the Directors believe provides sufficient headroom to manage the business and meet its strategic objectives. The Company does not use any complex financial instruments.

Credit Risk

The Company is involved in the provision of consumer credit and a key risk for the Company is the credit risk inherent in amounts receivable from customers which is principally controlled through credit control policies supported by regular impairment reviews. The amounts presented in the balance sheet are net of provisions for impairments.

Operational Risk

The Directors are confident that they have mitigated operational risk through an embedded control environment with the use of integrated technology and in-depth Management Information reporting data. The Company has a strong compliance culture, with robust systems and controls and provides regular regulatory training to all employees and agents.

Regulation

The Company is fully committed to working with the regulator in an open and on-going dialogue through its regular supervisory regime. The Group does carry a risk and uncertainty which may arise through changes to regulation or a failure to comply with existing rules and regulations.

The Company is also subject to legislative regulatory changes within the consumer credit sector and stays in touch with changes through its compliance and credit risk functions via the Consumer Credit Association and regular dialogue with the FCA.

Related Party Transactions

Related party transactions are disclosed in note 11 of these financial statements.

By order of the board:

Andy ThomsonChief Financial Officer

Date: 4 October 2018

Registered Office:Kingston HouseCentre 27 Business ParkWoodhead RoadBirstallBatleyWest YorkshireWF17 9TD

INDEPENDENT REVIEW REPORT TO MORSES CLUB PLC

We have been engaged by the company to review the condensed set of financial statements in the interim financial report for the 26 weeks ended 25 August 2018 which comprises the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and related notes 1 to 11. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review 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, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the AIM Rules of the London Stock Exchange.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

Scope of the audit of the financial statements

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the 26 weeks ended 25 August 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules of the London Stock Exchange.

Deloitte LLP

Statutory Auditor

Birmingham, United Kingdom

Date: 4 October 2018

CONDENSED CONSOLIDATED INCOME STATEMENT

FOR THE 26 WEEK PERIOD ENDED 25 August 2018

All results derive from continuing operations. A Statement of Comprehensive Income is not included as there is no other income or losses, other than those presented in the Income Statement.

CONDENSED CONSOLIDATED BALANCE SHEET

AS AT 25 August 2018

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE 26 WEEK PERIOD ENDED 25 August 2018

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

FOR THE 26 WEEK PERIOD ENDED 25 August 2018

NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

FOR THE 26 WEEK PERIOD ENDED 25 August 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE 26 WEEK PERIOD ENDED 25 AUGUST 2018

1. ACCOUNTING POLICIES

General information

The Company is a public limited company incorporated and domiciled in the UK. The address of its registered office is Kingston House, Centre 27 Business Park, Woodhead Road, Birstall, Batley, West Yorkshire, WF17 9TD.

The information for the year ended 24 February 2018 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The report of the auditor on those financial statements 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.

The unaudited condensed interim financial statements for the 26 weeks ended 25 August 2018 have been reviewed, not audited, and were approved by the Board of Directors on [4 October 2018].

Going concern

The Directors have considered the appropriateness of adopting the going concern basis in preparing these Condensed financial statements.

The Group has prepared a three-year business plan which is a continuation of its strategy of generating growth through organic and acquisitive means.

In addition to standard internal governance, the Group is also monitored against key financial covenants tied in with the current funding facilities. These are produced and submitted on a monthly basis, with key schedules included in the monthly Board Papers.

The Group is subject to a number of risks and uncertainties which arise as a result of the current economic environment. In determining that the Group is a going concern these risks, which are described in the principal risks and uncertainties section, have been considered by the Directors. The Directors have considered these risks in the Group's forecasts and projections which highlight continued profitability for the foreseeable future. 

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Accounting convention

The statutory annual financial statements of Morses Club PLC are prepared under International Financial Reporting Standards (IFRS) adopted by the European Union. The condensed set of financial statements included in this half yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

Accounting policies

New and amended standards and interpretations need to be adopted in the first interim financial statements issued after their effective date (or date of early adoption). Other than IFRS 9, already disclosed, there are no other new IFRSs or International Financial Reporting Interpretations (IFRIC) that are effective for the first time for the 26 weeks ended 25 August 2018 which have a material impact on the Group. As such the accounting policies applied in preparing the unaudited condensed interim financial statements are consistent with those used in preparing the statutory financial statements for the year ended 24 February 2018, other than the implications of adopting IFRS 9.

IFRS 9 has been adopted without restating comparative information. The reclassifications and the adjustments arising from the new impairment rules are therefore not reflected in the balance sheet as at 24 February 2018, but are recognised in the opening balance sheet on 25 February 2018. As prior periods have not been restated, changes in impairment of financial assets in the comparative periods remain in accordance with IAS 39 and are therefore not necessarily comparable to the loss provisions reported for the current period.

IFRS 9

IFRS 9 'Financial instruments' was mandatory for the first time for the accounting period starting 25 February 2018 and replaces IAS 39 'Financial instruments: Recognition and measurement'.

Classification and measurement

In adopting IFRS 9 the Group firstly considered the three available classifications of Financial Assets for businesses

· Hold to collect - the asset is held to collect contractual cash flows

· Hold to collect and sell - the asset is held to collect contractual cash flows but may sell them at some future point

· Hold to sell - an asset is originated with the intention of disposing of it

The most appropriate classification for the Group for all financial assets is Hold to collect, which requires assets to be held at amortised cost, as the Group has no intention of selling the assets which it originates. This is subject to the contractual cash flows for loans being only repayments of principal and interest, of which they are.

Impairment of amounts receivable from customers

IFRS 9 significantly changes the recognition of impairment on customer receivables by introducing an expected loss (EL) model. Under the EL approach, impairment provisions are recognised on inception. This differs from the incurred loss model under IAS 39 where impairment provisions are only reflected when there is objective evidence of a credit-affecting event, such as a missed payment.

The resulting effect is that impairment provisions under IFRS 9 are recognised earlier. This has resulted in a one-off adjustment to receivables and reserves on adoption and results in the delayed recognition of profits.

Provisions are based on historical default and collection performance which are reviewed at each reporting period. Based on considerable sector experience management consider the impact of macro-economic indicators in the home credit industry to be minimal and therefore no overlay has been applied.

There will be a small shift in distribution of profit between H1 & H2 with a slightly higher profit in H1 and a slightly lower profit in H2. Distribution of profits are affected by the business' seasonality and will be lower in times of growth due to higher day 1 provisioning.

The Group has adopted the standard 3 banding profile for customer accounts receivable as outlined in the standard and classifies customer receivables into the following categories;

Stage 1 - Low Credit Risk

Stage 2 - Significant Increase in Credit Risk

Stage 3 - Credit Impaired

From the date of adoption the Group applies the following income and impairment methodologies for the amounts receivable from customers

Revenue recognition

In addition to earlier recognition of impairments through the expected loss model there is also a change to revenue recognition. Interest income, for receivables in Stage 1 and Stage 2 is calculated on gross carrying value, using the EIR method. The EIR is calculated using estimated cash flows, based on contractual cash flows adjusted for early settlement and late repayments. Income on loans in Stage 3 is now being calculated on the net carrying value i.e. gross carrying value less impairment provision.

Impact of adoption

The following table shows the adjustments required in the key Balance Sheet areas at adoption on 25 February 2018

The IFRS 9 adjustment, as shown in the table above, is the net impact after consideration of both the revenue recognition and impairment criteria under the new standard.

The only IFRS 9 adjustment is in respect of the changes in the measurement of net receivables and the resulting impact on taxation.

At the IFRS 9 conversion date of 25 February 2018 the amounts receivable from customers analysed across the 3 Stages are as follows;

2. SEASONALITY

The Group's peak period of lending to customers is in the run-up to Christmas in the second half of the financial year. Typically approximately 54% of the loans issued are made in the second half of the financial year and the peak lending and collections period leads the Group to operate with a materially higher draw down on debt facilities in December. In addition, the Group's accounting policies relating to revenue and impairment are an important influence on the recognition of the Group's profit between the first and second halves of the financial year.

3. RESTRUCTURING COSTS

Following the acquisitions within the prior periods and their subsequent integration within Morses Club PLC, £nil (H1 FY18 - £1,020,000) (YE 18 - £1,020,000) of restructuring costs were incurred and these form the majority of the exceptional items. These have been included within administration expenses.

4. TAXATION

The tax charge for the period has been calculated by applying the directors' best estimate of the effective tax rate for the financial year of 19% (H1 FY17 - 23.87%) (YE FY18 - 19%), to the profit before tax for the period. The tax rate reflects the reduction in the mainstream UK corporation tax rate from 20% to 19% which was effective from 1 April 2017.

5. DIVIDENDS

The directors have declared an interim dividend in respect of the 26 weeks ended 25 August 2018 of 2.6p per share (H1 FY18 - 2.2p) (YE FY18 - 6.5p) This dividend is not reflected in the balance sheet as it was declared after the balance sheet date. It will result in a total half year dividend pay-out of approximately £3.4m (H1 FY18 - £2.9m) (YE FY18 - £8.4m). A dividend of £6.2m (H1 FY18 - £5.6m) was paid during the period.

6. EARNINGS PER SHARE

Diluted earnings per share calculated the effect on earnings per share assuming conversion of all dilutive potential ordinary shares. Dilutive potential ordinary shares are calculated for awards outstanding under performance related share incentive schemes such as the Deferred Share Plan. The number of dilutive potential ordinary shares is calculated based on the number of shares which would be issuable if the performance targets have been met.

7. OTHER INTANGIBLE ASSETS

8. TRADE AND OTHER RECEIVABLES

Amounts receivable from customers

9. BANK AND OTHER BORROWINGS

In August 2017, the Company signed a £15,000,000 loan facility to bring its total revolving credit facilities to £40,000,000. 

Total bank and other borrowings, including unamortised arrangement fees, are £11,677,000 as at 25 August 2018 (H1 FY18: £16,432,000).

Repayments of loans amounting to £4,000,000 were made during the period, in line with repayment terms.

10. RESERVES

Details of the movements in reserves are set out in the statement of changes in equity. Share capital as at 25 August 2018 amounted to £1,295,000 (H1 FY18: £1,295,000).

11. RELATED PARTY TRANSACTIONS

Up until 21 February 2018 the Company was a 51% subsidiary of Hay Wain Group Limited. Hay Wain Group Limited's shareholding reduced on 23 February 2018 to 36.8% and as such it no longer holds a controlling interest in the Company. From 24 February 2018 the Directors consider there to be no ultimate Parent Company. Shelby Finance Limited and Shopacheck Financial Services Limited are subsidiaries of Morses Club PLC.

The Company undertook the following transactions with Hay Wain Group Limited and Shelby Finance Limited during the period:

At the period-end the following balances were outstanding:

Alternative performance measures

This Interim Report and Financial Statements provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide readers with important additional information on our business. To support this we have included a reconciliation of the APMs we use where relevant and a glossary indicating the APMs that we use, an explanation of how they are calculated and why we use them.

1 Adjusted PAT for each interim period has been reconciled on page 8

2 The 12 month average for PAT, the net loan book and tangible equity figures cannot be directly traced back to the primary statements

3 The definition of Adjusted Return on Net Assets changed between August 2017 and August 2018 from adjusted profit after tax divided by 12 month average Total Assets excluding Intangibles to adjusted profit after tax divided by 12 month average Net Loan Book. If the new methodology was used for H1 FY17, the rate would be 22.9%.

Key Performance Indicators - Like for Like IFRS9 and IAS39

The table is present to enable users to understand the key performance indicators on a like for like basis

1 KPI not quoted as it includes data points which precede the date of IFRS 9 transition

1 Net Loan Book IFRS 9 ECL adjustment includes the transitional adjustment