MCL.L Regulatory News (MCL)

27 November 2020

Morses Club PLC

Preliminary results for the 53 weeks ended 29 February 2020

Morses Club PLC ("the Company" or "the Group"), an established provider of non-standard financial services, is pleased to announce its preliminary results for the 53 weeks ended 29 February 2020.

Financial Highlights:

· Revenue increased by 14.3% to £133.7m (FY19: £117.0m)

· Total credit issued to HCC customers was 2.2% lower at £174.2m (FY19: £178.1m). Total credit issued to all customers of £190.3m

· Net loan book, after Covid-19 adjustment of £1.7m, reduced 0.3% to £72.8m

· Normalised adjusted profit before tax1 of £15.5m (FY19: £22.0m)

· Statutory profit before tax of £11.5m (FY19: £20.2m)

· Normalised adjusted HCC profit before tax1 of £24.5m, an increase of 8.9% (FY19: £22.5m)

· Statutory HCC profit before tax £21.2m is an increase of 2.4% (FY19: £20.7m)

· Normalised adjusted loss before tax1 in Digital division of (£9.0m) as a result of enhancing scale and capability of recent acquisitions (FY19: (£0.5m))

· Statutory loss before tax in Digital division (£9.7m) (FY19: (£0.5m))

· Impairment as a percentage of revenue for the period, before the Covid-19 adjustment of £1.7m, was 26.0% (FY19: 22.4%)

· HCC normalised adjusted return on assets1 of 31.1% (FY19: 25.4%)

· Normalised adjusted EPS1 of 9.5p (FY19: 13.6p)

· Statutory EPS of 7.3p (FY19: 12.5p)

· Post balance sheet event estimated negative impact of Covid-19 (£5.2m) (FY19:£nil)

· No staff furloughed nor any Government debt or other support packages accepted

· Proposed final dividend of 1.0 pence per share (FY19: 5.2p) taking the total dividend for the year to 3.6p (FY19: 7.8p)

Operational Highlights:

· Group customer numbers increased by 9.0% to 255,000 (FY19: 234,000)

· Development and launch of fully online Customer Portal, with over 78,000 customers at end FY20 (FY19: nil)

· Acquisition of the business and certain assets of CURO Transatlantic Limited, an online lender, with 37,000 customers, operating under the Dot Dot Loans brand

· Acquisition of U Holdings Limited, an e-money current account provider, with 18,000 customers, operating under the U Account brand

· Commenced re-engineering of our online businesses to build our product offering and take advantage of the opportunity in the wider non-standard credit market

· Delivering further technology enhancements in our HCC business to provide a digital service to customers enabling a virtually paperless documentation process

· Due to Covid-19, reconfigured our lending, collecting and operating processes to ensure the safety of our customers, employees and agents

Alternative Performance Measures & Key Performance Indicators

1 Definitions are set out in the Glossary of Alternative Performance Measures in Morses Club's 2020 Annual Report

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

"FY20 was a year of significant regulatory and operational change for Morses Club, with the Company making considerable progress in advancing its strategy, particularly in the development of the Digital division. HCC remained stable during the year while maintaining strong customer satisfaction levels of 97%. The launch of our online customer portal exemplified the strong progress made in terms of our customer service and digitalisation, with over 78,000 customers registered on the platform by year end, and over 117,000 customers now registered to date.

"The acquisitions of the business and certain assets of CURO Transatlantic Limited and U Holdings Limited enhanced our offering across online loans and digital current accounts. While the division's losses due to the ongoing re-engineering of the businesses were slightly higher than anticipated, Morses Club is confident that the resulting offering will position the Group well to take market share in the online non-standard current account and credit space. The Digital division is on track to report a break-even position during FY22.

"Since the impact of Covid-19 on our markets, I have been impressed by the resilience and adaptability of the Group during a period of unprecedented change. The way in which we were able to quickly implement wide-ranging operational changes and leverage our platform to continue to lend to customers is testament to the dedication of our employees and agents, and the customer-centric culture we strive for at Morses Club. It has also been pleasing to see the acceleration of the digitalisation of the Group as a result of Covid-19, with demand for our digital products increasing since the first national lockdown in March.

"With the progress made last year, our strategy remains to focus on our customers, leverage and progress our digital capabilities and drive market share growth within the wider non-standard finance market. Morses Club is financially robust, and I look forward to further progress being made across the Group during the rest of the year. Morses Club is well placed for a post Covid-19 recovery in consumer borrowing."

Sell-side Analyst Presentation  

The Company will be holding a virtual sell-side analyst presentation at 09:30 this morning. Please contact morses@camarco.co.uk if you would like to attend.

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:

Notes to Editors

About Morses Club

Morses Club is an established provider of non-standard financial services in the UK. The Group consists of Morses Club, the UK's second largest home collected credit ("HCC") provider, and Shelby Finance Limited, Morses Club's digital division, which operates under two online brands, Dot Dot Loans, an online lending provider, and U Account, which offers online e-money current accounts. The Group's growing digital capabilities and scalable, highly invested IT platform has enabled Morses Club to deliver an increasingly broad range of financial products and services to the non-standard credit market.

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 million1 people using the services of UK HCC lenders.

Morses Club's HCC division is the second largest UK Home Collected Credit (HCC) lender with 221,000 customers throughout the UK. The majority of the Company's customers are repeat borrowers and the HCC division enjoys consistently high customer satisfaction scores of 97%2. In 2016, the Morses Club Card, a cashless lending product, was introduced and in 2019 the Company introduced an online customer portal for its HCC customers, which now has over 117,000 registered customers.

The Group's growing digital division, Shelby Finance, operates under two online brands. Dot Dot Loans provides online instalment loans of up to 48 months to 20158 active customers. U Account is a leading digital current account provider offering an alternative to traditional banking by providing a fully functional agency banking service. U Account currently has c. 13365 customers. 

Morses Club 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 consumers3 and total loan receivables of £10.7bn4.

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. Approximately 2 million people move annually between standard and non-standard markets4.

Since February 2014, unsecured personal lending has grown from £161 billion to £216 billion in February 20195.

1 High Cost Credit Review ANNEX 1 - July 20172 Independent Customer Satisfaction Survey conducted by Mustard3 FCA High Cost Credit Review Technical Annex 1: CRA data analysis of UK personal debt - July 20174 Apex Insight - Non-Prime Consumer Credit: UK Market Insight Report - September 20195 Table A5.2, Bank of England Money and Credit Bank stats February 2019

Review ANNEX 1 - July 2017

Chief Executive Officer's Review 

We have made significant progress in enhancing our product offering to our core customers. 

Performance

FY20 was a year of significant regulatory and operational change for the business, as well as significant progress in our digital acquisition strategy. Total credit issued in our home collected credit division was £174.2m, slightly lower at -2.4% relative to the previous year (FY19: £178.5m), with our gross loan book marginally reduced by 2.4% from the FY19 figure. 

The whole HCC sector saw a drop-off in sales following FCA changes to lending rules, however, our business was the least affected and consequently gained share. Our customer numbers remained broadly stable at 221,000, and we maintained our high levels of customer satisfaction of 97% and above. 99% of our employees scored Treating Customers Fairly (TCF) as part of the daily mindset of the business, with 90% believing that we offer good customer service. The self-employed agents who support our business gave a score of 96% meaning that TCF is part of the daily mindset of their business, with 95% understanding the importance of TCF. 

During the year we have made significant progress in developing our Digital division. Following the acquisitions in February 2019 of the business and certain assets of online loan provider CURO Transatlantic Limited (now trading as Dot Dot Loans) and online e-money current account provider U Holdings Limited in June 2019 we have been rightsizing the businesses to move their cost bases to an appropriate level for their size. The losses were slightly deeper than we had anticipated, but we are on track to transition the digital business to a break-even position over the coming 2 years. 

Since the end of the year we have faced the challenge of managing the impact of Covid-19. The business has quickly introduced wide-ranging adaptations to our operating model to ensure the safety and wellbeing of our staff and self-employed agents and to enable us to maintain our high levels of customer service during this period. More information on the steps we have taken are set out later in my review. 

Principal drivers of performance

HCC 

We are delighted that - less than a year since launch - around 35% of our customers are interacting with us via our Morses Club online portal, which now has more than 78,000 users. Customers using the portal generate significantly higher levels of interest in further credit options, since they are able to request credit at any time, rather than relying on the weekly visit with their agents under our traditional model. In addition to the portal, customers have responded positively to remote payment methods and 41% of all collections were being made remotely by the end of the year. 

The move to digital has been embraced by our agents, who understand that, although they earn lower commission on digital repayments, the reduced need for physical visits allows agents to serve a larger base of customers. Increasing penetration of digital transactions has increased our customer satisfaction levels and reduced cost. The shift to digital has also given us scope to allow the gradual natural attrition of our agent base. As agents retire or leave, we can reallocate their loan books to agents in adjacent areas, enabling us to reduce costs. These agents benefit from an increased customer base, which our enhanced technology, and remote payment methods enables them to manage. We are targeting the removal of £1m of cost pa in HCC field-based costs over the next 5 years, and are well on track to achieve this. 

We continue to be open to high-quality acquisitions as a means of growing our customer base, where attractive opportunities arise. 

Digital 

The portal platform will be extremely important to our online lending and e-money current account businesses. Our research with HCC customers indicates that a high proportion of them want to use online banking services, and the portal will allow them to manage their home collected credit loans, agent interaction, Morses Club Card and their bank account. 

Our HCC customers have an average of 27% of their debt with HCC providers and a further 36% with other providers, for example overdrafts. The portal allows us to offer customers the opportunity to consolidate their debt in one place. The independent market research we undertake monthly shows us that linked services continue to be of interest to our customers. In future we will seek to provide offerings to help customers manage their budget and access services such as utility switching and comparison services; if customers give us permission to access the data on their spend on these services, it will help us to tailor our offering still further to support their financial wellbeing. 

Systems 

Our technology platform developments are now significantly complete for HCC. We have made further enhancements to our Customer Relationship Management (CRM) telephony system and how this is used in our Nottingham contact centre, which will help to enhance and integrate the support across all our businesses as we target a substantial customer base using all 3 of our brands. Our loans platform, CRM platform and telephony are our focus for the next year for delivering integrated customer excellence and supporting our business plan. 

External market 

We saw minimal impact from the changes in lending regulations following the FCA's review of high-cost credit, and implemented the small adjustments required to our processes in a timely manner. 

Although HCC and parts of the associated market are generally unaffected by macroeconomic movements, increases to the national minimum and living wage levels are positive for our business as they support affordability decisions, and give our customers confidence in spending and borrowing. The impact of Covid-19 meant that from March 2020 onwards we adapted operational processes to ensure we maintained our service model for our existing customers. 

In the digital space, we have observed a number of firms struggling to stay in business or acquire customers due to historical issues in relation to treating customers fairly. Providers with roots in payday lending have historical books that have since been classed as irresponsible lending, and claims management companies are targeting them. As some of these providers exit the market, there is scope for us to acquire good quality recently issued debt.

We are closely monitoring the impact of Covid-19 on our customers and the macroeconomic environment more broadly and have been able to adapt our business quickly to maintain business continuity and ensure we can support our customers. 

Strategy 

Our objective is to continue to listen to what customers tell us they want and to deliver it for them. Our research with our existing customer base indicates that consistently over 50% of them want to use our e-money current account services linked to a credit facility in the future, in addition to the relationship credit that they already have. We already have the technology platform in place, so our focus next year will be on the delivery of an intuitive customer journey and on communications and marketing as we seek to drive the penetration of e-money current accounts and digital credit products among our HCC customers to take an increased share of their credit demand away from the competition. We will also look to increase volume amongst the 8.5m non-HCC customers who are in the non-standard credit market of banking, long-term lending, revolving credit and short-term lending, as we strive to make our other 2 brands as profitable as our home collected credit brand in the longer term. 

Capital allocation 

At the end of April 2020 we secured an extension to our revolving credit facility of £40m to the end of November 2021. This funding level better reflects the ongoing requirements of the business, with reduced growth in the short/medium term, in a post Covid-19 world. This reduces the costs of funding whilst still giving us significant headroom in our existing facilities to achieve our ambitions and support the business at this challenging time. 

People, culture and stakeholder engagement 

We are delighted to have welcomed and retained the expertise of some highly experienced colleagues during the year. 

Gary Marshall joined as Chief Operating Officer of Shelby Finance Limited in July 2019. His deep experience in online banking and insurance environments is already proving invaluable for the development of U Account and Dot Dot Loans as well as improving productivity and driving down costs. We are pleased to have retained the expertise of Les Easson, our previous Operations Director as he made the transition to a Non-Executive Director role. In addition, Andy Thomson, our previous Chief Financial Officer, has agreed to undertake the role of Interim Chief Financial Officer from 17 March 2020 and has stepped down from his current role as a Non-Executive Director. 

We are proud of the people and culture at Morses Club. Our participation in the FCA's Smaller Business Practitioner Panel is testament to the recognition by the regulator as a firm that does the right thing, treats customers fairly and has a deep-seated cultural belief in putting customers first. 

During a period of significant change and innovation it is gratifying how the Morses Club team of employees and agents have continued to embrace developments. In recognition of the contribution made by our colleagues, we issued shares to all eligible staff and recently won an award for our employee share scheme. As part of our commitment to ongoing stakeholder engagement, we undertake monthly surveys with customers, to assess their satisfaction. In addition, we conduct quarterly surveys with customers to check their overall experience in dealing with us, as well as former customers annually. Our surveys include those customers whose loans may be in arrears, and who we may not lend to again. We take the time to consider all feedback from our customers, and their involvement in how we build our products and services is critical in developing our future strategy. It is encouraging that the consistent results of both surveys are 97% or more. 

Covid-19 

As a business, our focus will always be on lending responsibly and conservatively, putting the customer first whilst ensuring the safety and wellbeing of our employees and agents. We responded rapidly to the outbreak of Covid-19 just after the year end, successfully adapting our operating model to enable all our agents to work from home and replacing face-to-face customer visits with a remote customer communication strategy, which makes use of our existing technology platform and payment methods to maintain customer contact and collection activity. Our normal adherence to TCF principles and forbearance continues. The Company has decided not to furlough any of its staff and all staff and agents are continuing to work remotely in support of customers. 

We have recently launched a new cashless remote lending product, which is available to all existing Morses Club HCC customers and is compliant with all regulatory requirements. All necessary checks and agreements are transacted via our online Customer Portal, leveraging our existing technology platform. Customers using the new remote lending product can choose to have funds deposited directly into their bank account or loaded onto a Morses Club Card, ensuring that existing customers can continue to access our products and services during this time. 

Customer response to our remote operating model has been positive and we have successfully transitioned 40% of repayments from face to face to remote collections since the outbreak of Covid-19. 

Outlook 

The safety and wellbeing of our employees and customers remains our priority. Going forward we expect growing numbers of our customers to engage with us via our technology platform. We are also looking at ways to implement social distancing measures across our business to enable us to resume face-to-face visits and our loan offering to new customers in a safe environment. The Group remains highly cash generative as a result of the actions we have taken and post year end we have also secured additional funding to support the business at this challenging time. We will continue to focus on effective cash-flow management and this is supported by temporarily suspending home collected credit loans which involve cash, lending to new customers, significant tightening of online lending decisions, cutting discretionary expenditure and an increased focus on collections. 

Over the longer term, in HCC, the growing adoption of the digital portal will create value for customers, agents and the Group, and the gradual evolution of our agent network will drive further economies in our cost base. In our Digital division, we are confident that our strategy of developing our digital lending and e-money current account brands will deliver a positive financial contribution, however, for the current year we anticipate continued losses, primarily as a result of not being able to increase volumes due to the impact of Covid-19, with profitability reached in FY22. 

The Board recognises the difficulty in fully assessing the long-term operational impact of Covid-19 on the business and therefore considers it prudent to withdraw its financial guidance for FY21. In full consideration of all relevant circumstances, the Board will recommend payment of a dividend in February.

Paul Smith

Chief Executive Officer

Date: 27 November 2020

Chief Financial Officer's Operational and Financial Review

Whilst the Group has made excellent progress in growing HCC profits in a mature marketplace, the new Digital acquisitions have contributed losses to the business that have reduced overall profitability. This year, we are also required to identify the possible adverse impact of Covid-19 on the impairment of our closing loan book that would have been foreseen at the year end. This has further suppressed our overall performance. 

However, we are confident that our Digital strategy combined with what we believe to be a best-in-class HCC business will see us emerge from this difficult period as a strong and profitable business. 

Overview  

The results for the Group for the 53 weeks ended 29 February 2020 have been affected by the requirements of IFRS9 to report the possible impact that would have been foreseen at the year end of the Covid-19 pandemic on the closing balance sheet for FY20. This required us to assess the likely decrease in cash flows from our closing loan books as a result of both our customers inability to pay and, in the case of home collected credit, our inability to collect from customers during a lockdown. These adjustments have required additional provisions of £1.7m (FY19 £nil) which directly reduced earnings by the same sum. The approach and assumptions of the additional Covid-19 provision are detailed in Note 16. 

In addition, we also considered the subsequent impacts of Covid-19 that became known after the year end which we have noted as Post Balance Sheet Events (PBSE). The various aspects of these impacts are summarised in the table below and detailed in Note 30 of the financial statements.

Post Balance Sheet Events re Covid-19 (unaudited):

On a 'normalised' basis, our results excluding the Covid-19 adjustment, we achieved a normalised adjusted profit before tax of £15.5m (FY19: £22.0m) which after the Covid-19 adjustment reduced to £13.8m. Statutory profit before tax of £11.5m would have been £13.2m on a normalised basis were the £1.7m Covid-19 adjustment to be added back (FY19: £20.2m).

Reconciliation of Statutory profit before tax to Normalised Adjusted and Adjusted profit before tax and explanation of Normalised and Adjusted EPS

1 Definitions are set out in the Glossary of APMs

2 Adjustments in connection with CURO Transatlantic Limited and U Holding Limited acquisitions

3 Amortisation of acquired customer lists and agent networks

The HCC business continued to perform strongly in what we believe is a mature and probably declining marketplace. Whilst closing customer numbers fell by 5.6% and gross receivables by 1.6%, income increased by 2.3% to £119.3m (FY19: £116.6m). This resulted in a Normalised Adjusted Profit before tax of £24.5m which was 8.9% up compared to FY19 of £22.5m. The Covid-19 impairment adjustment reduced this to £22.8m, still a year-on-year increase of 1.3%. 

We made great strides in enhancing the scale and capability of our Digital business during the year, albeit with a significant impact on profitability. We acquired the business and certain assets of CURO Transatlantic Limited at the end of February 2019 from the Administrator. Whilst the business had suffered from a legacy of payday loans dating back to 2004, we only acquired the current instalment loans part of the loan book. Whilst we were able to acquire the business at a very small uplift to the net assets (£0.1m), we knew that the turnaround and growth of the business was likely to incur trading losses in FY20. 

In addition, we acquired the digital banking business U Holdings Limited, trading as U Account in June 2019. Like most digital online current account providers, this is currently loss-making though we have a clearly defined strategy to grow this through FY21/FY22 with a view to integrating lending products into a one view of the customer model that should result in improved customer outcomes and financial performance. 

As a result of these acquisitions, the digital adjusted loss before tax increased significantly to (£9.0m) against an adjusted loss for FY19 of (£0.5m). 

Total equity was virtually unchanged, decreasing by 0.4% to £70.7m (FY19: £71.0m), as a result of the impact of the Covid-19 adjustments which after tax adversely impacted total equity by (£1.4m). The move to IFRS 16 had a negligible impact on net assets.

Trading Summary

Group Results  

Credit issued to customers increased by 6.6% to £190.3m (FY19: £178.5m) mainly due to the increase in Digital which increased by £15.7m to £16.1m (FY19: £0.4m) reflecting the acquisition of certain assets from the business and CURO Transatlantic Limited in February 2019. HCC credit issued declined by 2.2% to £174.2m (FY19: £178.1m) which we believe reflects the maturity of this market. 

Revenue increased by 14.3% to £133.7m (FY19: £117.0m) with the majority of the increase due to the acquired digital businesses, £14.4m compared to FY19: £0.4m. HCC also saw a small 2.3% increase in revenue due to slightly higher yields. 

HCC gross profits before the Covid-19 adjustment increased to £64.7m (FY19: £62.4m), an increase of 3.7%. The gross profit percent increased to 54.2% from FY19 53.5%. Within the cost of sales, impairment before the Covid-19 adjustment increased from 22.2% to 23.1%, with poorer loan performances identified across newer and more remote customers in the last few months of the year. However, the overall performance still sits comfortably within our guidance range of 21.0% to 26.0%. The increased impairment costs were more than offset by agent commission costs reducing from 24.3% to 22.6%. This was as a result of there being no material territory build subsidies in the year and the full year effect of the phasing out during FY19 of the remaining commission protection arrangements to newer agents. 

Administration expenses (including depreciation) increased significantly from £38.8m in FY19 to £52.5m in the current year. This was entirely due to the digital businesses acquired in the year. 

HCC administration expenses (including depreciation) were flat at £38.0m (FY19: £38.2m), against a 2.3% increase in revenue, although this was in part due to IFRS16 reclassifying £0.5m of lease costs within finance costs.

The comparison of the profit and loss account charges resulting from the implementation of IFRS16 is detailed in the table below:

Aside from the impact of IFRS16, depreciation costs in HCC increased by £0.2m to £1.9m (FY19: £1.7m) due to our ongoing investment in our HCC technology platforms.

Normalised adjusted profit before tax fell 29.5% to £15.5m (FY19: £22.0m). Within this the HCC business increased normalised adjusted profit before tax by 8.9% to £24.5m (FY19: £22.5m), with the gross profit increase of £2.3m being only slightly offset by a £0.3m increase across administration costs, depreciation and funding costs. The digital businesses had an adverse impact on performance with a normalised adjusted loss before tax of £9.0m, an increase from FY19's loss of £0.5m. 

The HCC normalised return on assets remained a healthy 31.1% compared to FY19 25.4%. After the Covid-19 adjustment the adjusted return on assets was 29.3%, still an improvement compared to FY19. 

With the additional charge for impairment as a result of Covid-19 of £1.7m, this reduced the adjusted profit before tax to £13.8m (FY19: £22.0m). The details of the Covid-19 scenario we considered and the probability attached to it that resulted in the Covid-19 adjustment of £1.7m can be found in Note 16 of the accounts. A table of adjustments between reported profit before tax and normalised adjusted and adjusted profit before tax is shown above. 

Acquisition, restructuring and non-recurring costs increased to (£3.5m) from (£0.8m), the increase being in connection with the digital acquisitions with the restructuring costs in HCC being similar to last year (FY20: £0.9m, FYH19: £0.8m). The digital costs were largely in relation to headcount reductions, IT transition costs, acquisition costs and office relocation. 

The exceptional gain of £2.3m is in connection with the release of excess deferred consideration associated with the acquisition of U Holdings Limited; this was connected to performance criteria that were largely not achieved. 

Amortisation of acquisition intangibles increased slightly from (£1.0m) to (£1.2m) as a result of the additional charge of (£0.4m) from the acquisition of the digital businesses. 

The statutory profit before tax fell by 43.1% to £11.5m (FY19: £20.2m). 

Earnings Per Share 

The normalised adjusted earnings per share for FY20 was 9.5p, a decrease of 30.1% relative to 13.6p for FY19. The adjusted earnings per share was 8.4p, a 38.2% reduction compared to 13.6p for FY19. The reported earnings per share for FY20 was 7.3p compared to 12.5p for FY19, a decrease of 41.6%. 

Dividend  

After the impact of Covid-19 and the lockdown became a reality, the Group announced that it would be postponing its decision to make a final dividend payment whilst it assessed the impacts of the pandemic. During this time, we have extended our loan facilities and cash flows have exceeded expectations as we adapted, and continue to adapt, to the ever-changing demands on the business. We are pleased to say that we did not furlough any staff or take on any debt or other support packages offered by HM Government during the crisis. 

As a result of this and subject to shareholder approval at the General Meeting on 7 January 2021, the Board proposes to pay a final dividend of 1.0p per Ordinary Share (FY19: 5.2p) payable on 12 February 2021 to shareholders on the register at the close of business on 15 January 2021. 

This payment is in addition to the interim dividend already paid of 2.6p per Ordinary Share, making a total dividend for the year of 3.6p (FY19: 7.8p). This represents a total payment for the year of 38% of normalised adjusted profits after tax which is below our normal dividend policy of paying between 50% and 60% of normalised adjusted profits after tax. However, the Board has noted that the profit is largely before Covid-19 and believes that we should remain particularly prudent in the current uncertain times. 

Acquisitions and Goodwill 

At the beginning of the financial year, the Group acquired the business and certain assets of online lender CURO Transatlantic Limited for £8.0m. This acquisition was in line with our stated strategy to diversify the products and markets that we serve in the non-prime lending space. This acquisition gives us scale and expertise to take our own Dot Dot Loans online product to a level where management are confident that it will be financially successful. We have been going through a complex integration process of re-platforming the incumbent technology, a process that has taken longer than we anticipated and will not be completed until early 2021. Due to Covid-19, it has been difficult to build up loan volumes to the required levels so far during FY20 and so we do not now expect to be profitable until later in FY22.

In June 2019 we acquired U Holdings Limited, a company providing e-money current account services, another major component of the Group's digital strategy. Whilst we acknowledge that this business may be loss making for a period of time, we have a strategy to expand it as a leading banking product to the non-prime space by developing integrated credit products to this customer niche. 

Below is an extract of the consideration, goodwill and assets acquired, more details can be found of the acquisitions in Note 26 to the accounts.

The contingent consideration was originally payable 5 years after the acquisition based on various performance targets and although management still expects to achieve these targets, the contingent consideration has been released. This is because the individuals qualifying for this left the business during the year and have forgone this additional remuneration which is shown as an exceptional gain in the trading Summary. See also Note 3. 

Funding  

We were pleased to announce at the end of April 2020 the extension of our loan facility with the incumbent lender consortium from August 2020 out to the end of November 2021. This was particularly pleasing as the facility extension was agreed and signed off during the most adverse period of the lockdown and we believe illustrates the confidence that our lenders have in the Group.

The facility limit was reduced from £55m committed to £40m as it became clear, as a result of Covid-19, that lending volumes during 2020 will be far lower than we anticipated coming into the year. By reducing this unused headroom, and repaying the £5m mezzanine layer, we will reduce our non-utilisation charges for any given level of borrowing and therefore overall cost of funding. We also took the opportunity to review operating covenants in light of the Covid-19 pandemic and given the reduced collections during the first stage of lockdown we agreed an amendment to one operating covenant, being the collection performance, to reflect this, though in the end we never breached the original unadjusted covenant. 

Borrowing peaked at £40.0m in December 2019 (December 2018: £21.5m) the increase reflecting the consideration paid for the acquisitions, restructuring costs and the subsequent digital loan book growth. We anticipated that the impact of Covid-19 would be a shrinking of the HCC loan book which would generate more cash and lead to lower levels of borrowing in the second half of FY21 compared to FY20. In September we reported that our borrowing at the end of August 2020 was £14m which compared to £23m in August 2019. 

Balance Sheet  

The total equity for the Group decreased by 0.4% from £71.0m reported in FY19 to £70.7m, reflecting the dividends paid, which included last year's final dividend, marginally exceeding the retained profit for the year. 

The main asset of the Group is our loan book, which on a net basis decreased by (0.3%) from £73.0m in FY19 to £72.8m in FY20. Excluding the Covid-19 adjustment the net loan book would have been £74.5m, an increase of 2.1%. The net loan book represents 103% of the total equity (FY19: 103%).

The biggest movement in other net assets is due to a tax credit last year of (£1.8m) becoming a tax receivable of £0.5m. In addition, prepayments increased by £1.3m and intangible assets by £1.2m. 

Cash Flow  

The summarised cash flow statement below demonstrates the healthy levels of cash generated by the business prior to acquisitions in the table below. The cash inflow from operations of £21.4m was up by 4.4% compared to £20.5m in FY19. The increase in bank borrowings of £19.5m reflected the cost of investing in acquisitions and assets of £22.4m.

Covid-19 and subsequent outlook 

The additional charge for Covid-19 of £1.7m taken to earnings in FY20 is summarised in the overview above and detailed in Note 16 to the accounts. This additional provision for expected credit losses is required by IFRS9 where not only do we have to consider the historical loan book performance in order to measure the likely future credit performance, but also consider economic and other factors that might affect the appropriateness of using this historical information unaltered. Since the adoption of IFRS9 the Group has, prior to FY20, concluded that there was no need to make any such adjustment. However, the Covid-19 pandemic required us to consider both the probability of higher expected credit losses under IFRS9 for the purpose of the FY20 accounts but also the non-adjusting post balance sheet impact under IAS10. 

The full impact of Covid-19 and the lockdown on the business will be higher than this, with lending volumes in FY21 being reduced as a result of a combination of customer financial difficulties, reductions in customer spending resulting in reduced borrowing, customer deleveraging and de-risking of their personal finances, higher unemployment and the application of higher credit scoring criteria which you would expect a responsible lender to apply during this economic uncertainty.

These factors are inevitably going to lead to a shrinking of customer numbers and the loan book in the established HCC business during FY21, and therefore revenues and gross margin. The digital business is unlikely to be able to grow as quickly as we anticipated on acquisition whilst maintaining debt quality at the levels we would responsibly target. As a result it will take longer than we originally planned to generate profits from these. However, the Group continues to track all aspects of these challenges and is confident that it will emerge as a profitable and stronger business.

Andy Thomson

Interim Chief Financial Officer

Date: 27 November 2020

Morses Club PLC

Consolidated Income Statement

For the 53-week period ended 29 February 2020

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

Morses Club PLC

Balance Sheet

As at 29 February 2020

Morses Club PLC

Consolidated Statements of Changes in Equity

For the 53-week period ended 29 February 2020

Morses Club PLC

Cash Flow Statements

For the 53-week period ended 29 February 2020

Morses Club PLC

Notes to the Consolidated Cash Flow Statement

For the 53-week period ended 29 February 2020

1 Reconciliation of profit before taxation to net cash inflow from operating activities

Morses Club PLC

Notes to the Consolidated Financial Statements

For the 53-week period ended 29 February 2020

1. Accounting policies

Basis of preparation

The preliminary announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the consolidated financial statements for the period ended 29 February 2020 which have been prepared under IFRS as adopted by the European and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

Shopacheck Financial Services Limited qualifies for an exemption to audit under the requirements of Section 480 of the Companies Act 2006. Shelby Finance Limited and U Holdings Limited both qualify for an exemption to audit under the requirements of Section 479A of the Companies Act 2006. As such, no audit has been conducted for these companies in the current financial year. As such, no audit has been conducted for these companies in the period ending 29 February 2020.

The preliminary announcement has been prepared on a going concern basis consistent with the basis of preparation of the statutory financial statements for the period ended 29 February 2020.

The preliminary announcement does not constitute the statutory financial statements of the Group within the meaning of Section 434 of the Companies Act 2006.

The preliminary announcement has been agreed with the Company's auditor for release

2. Profit before taxation cont.

Directors' and key management personnel remuneration includes the following expenses:

3. Taxation

3. Taxation contd.

The standard rate of corporation tax applicable for the period ended 29 February 2020 is 19% (2019: 19%).

4. Dividend per share

4. Dividend per share cont.

Subject to shareholder approval at the General Meeting on 7 January 2021, the Board proposes to pay a final dividend of 1.0 pence per Ordinary Share payable on 12 February 2021 to all shareholders on the register at the close of business on 15 January 2021

5. Earnings per share

Diluted earnings per share calculates 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 Plans. 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.

6. Goodwill

Key assumptions used in goodwill impairment review

Determining whether goodwill is impaired requires an estimation of the discounted future cash flows of the Company using a discount rate of 13% and an initial growth rate over the first 3 years of 22% followed by a terminal value based on a minimum future growth of 2%.

The Group has conducted a sensitivity analysis on the goodwill impairment assessment and believes that there are no reasonably possible changes to the key assumptions in the next year which would result in the carrying value of goodwill exceeding the recoverable amount. The recoverable amount has been calculated using the value in use method. Goodwill is tested for impairment annually or more frequently if there are indications that goodwill might be impaired. The key assumptions used in the value in use calculation are the growth rates and the discount rates adopted. The growth rates are based on the most recent financial budgets approved by the Group Board for the next three years. The discount rates which reflect the time value of money and the risks specific to the financial services sector are sourced from an independent third party.

6. Goodwill cont.

The carrying amount of goodwill has been allocated to cash-generating units as follows:

7. Other intangible assets

Research and development expenditure expensed during the year was £nil (2019: nil).

8. Trade and other receivables

Impairment provisions are recognised on inception of a loan based on the expected 12-month losses or the lifetime losses of the loan. Further details can be found on Pages 98 to 99 of the Annual report and Accounts.

8. Trade and other receivables cont.

Covid-19

The Group ran a number of scenarios to establish the impact of Covid-19. The scenarios were based on the impact on trading activity and in particular, future cash flows as a result of, and a consequence of, the Covid-19 outbreak.

All of these scenarios would impact the level of additional loan loss provision required both in terms of expected credit losses and the discounting impact of delayed or late payments.