Chief Executive's Report

Alan Hudson

Strong organic growth in 2016 and well- funded balance sheet have created a solid platform for future expansion

Strategic review
I am pleased to report another successful year during which our revenue and margins increased, driven by the organic growth of our core financial planning and investment management business. The distribution afforded by our advisers enabled AFH to grow its funds under management to over £2 billion with inflows of new funds exceeding £200 million, a double digit increase at a time when the sector continues to see single digit growth.

In a year in which the Group completed two acquisitions, the ability of AFH to report significant growth whilst improving margins supports the strategy set out by the Board in 2014 to place financial planning through face to face advice at the forefront of our proposition, supported by a strong infrastructure and professional investment management team.

2016 again demonstrated the importance of captive channels of distribution operating under a single brand, generating increasing levels of advisory revenue whilst securing strong inflows of funds and a low level of repatriations. The Group will continue to build on this strategic advantage through the ongoing recruitment, acquisition and training of financial advisers to extend our face to face service in the future.

Recent market surveys have indicated that there will be pressure to reduce product costs in the future, in part driven by the new competitors with technology driven offerings (including “robo-advice”) possibly backed by regulatory pressure. AFH has adopted a strategy of using its size and financial strength to negotiate rates on behalf of all of its clients and does not seek to add additional margin to these costs. The Board believe that AFH is at the forefront of this change on behalf of our clients and has embraced a business model that will not be negatively impacted by a reduction in product costs in the future.

The investment that has been made in people, technology and infrastructure during the last two years will allow AFH to continue to scale its operations and the initial benefits of scale are demonstrated in the results of the year under review. However, the Group operates in a rapidly changing market sector and in March 2016 the Board took the next step in its strategy to embrace digitalisation as a continuous strand throughout the organisation. This represents a two year plan that will flow from our clients, through our advisers to investment, compliance and back office functions to create greater visibility, in a sector that has earned a reputation for a lack of transparency. I believe that it will also bring more interaction between clients and the Group and greater efficiencies that will reduce the more mundane work processes for our employees and allow them to fulfil their potential within AFH.

As noted in the Chairman’s Statement, AFH remains well funded and continues to seek appropriate acquisitions that will embrace the AFH culture whilst enhancing shareholder value. 2016 was a year of organic growth during which the Group demonstrated that it was not just dependent on acquisitions to grow the business but could continue to develop a growing client base organically through a period of economic and political uncertainty. The ability of our internal operations to integrate the acquisitions completed since our IPO in June 2014 was tested and proven during the year and the successful retention of both clients and advisers was demonstrated by the earn out payments made in respect of these acquisitions. As previously reported, acquisitions have been achieving over 90% of the targets set at acquisition for the benefit of both vendors and AFH shareholders. This has also enhanced our reputation for openness during negotiations and throughout the deferred earn out period and confirmed our financial strength to the IFA market.

During the year our pipeline of potential acquisitions for both 2017 and the future was expanded and in the second half of the year an unprecedented number of approaches were received from introducers and via direct approaches. In September we launched an informative website “www.sellanifa.co.uk” explaining the acquisition process to potential vendors, the steps that they should take before embarking on such a process and the likely expectations of any acquirer company. The interest in this website was greater than anticipated and in addition to explaining some of the implications and processes of what is a once in a lifetime experience for many IFAs, it has opened discussions that could extend to opportunities in 2017 and beyond. As AFH enters 2017 the Group has already announced the completion of three acquisitions in Lancashire, Scotland and Devon to extend its national reach.

Our business remains focussed on the UK Mass Affluent market, which the Board believes is currently underrepresented and provides the greatest growth opportunities, providing advice to clients in an environment where the state is increasingly passing the responsibility for financial management to individuals. Through our advisers, the Group seeks to build strong long-term relationships with our clients. Our aim is to guide them to achieve their financial goals, and we believe that through face to face advice, supported by a centralised technical and investment team, we are able to provide clients with the most effective outcomes.

Following the completion of the interim period for the integration of IFS UK Limited on 31 October 2015, 18 advisers joined AFH to bring the total number of advisers to 143. During the year the average number of advisers remained constant (2015: 147) whilst the productivity, measured by average annualised gross revenue per adviser, increased to £168,000 (2015: £143,000). As outlined in my last report, the internal market facilitated by the Group continues to offer an opportunity for retiring advisers to realise the growth in the value of their client base, whilst enabling younger advisers within AFH to acquire client portfolios in a transparent and controlled environment. It is expected this will continue to develop further.

Financial Performance
Revenues grew by 15% to £24.1 million (2015: £21.0 million) driven by the strong performance of our investment portfolios in volatile markets and by increased adviser productivity. Recurring revenues, which are derived from the value of the portfolios on which we provide investment services, increased by 20% to £16.4 million. During the period new business generated by our advisers increased to £7.7 million (2015:£7.3 million) in spite of the uncertainty and turbulence in the financial markets during the period up to and following the EU Referendum. In addition, our gross margin increased to 55% (2015: 52%) enabling the Group to report a 22% increase in gross profits to £13.4 million.

The Group’s cost base, excluding Depreciation, Amortisation and non-cash share-based payments, increased by £1,728,000 to £9,951,000 (2015: £8,223,000). Much of this increase reflects the annualised cost increases in the second half of 2015 and was comprised of increased staff investment, which represents over 70% of our total expenditure, together with IT, marketing and infrastructure investment to support continued business growth.

EBITDA increased to £3.6 million (2015: £2.8 million), an increase of 29%, whilst cash generated from operations during the period increased by 45% to £3.2 million reflecting the increased cash generating ability of the Group and the high correlation between EBITDA and cash generation.

Depreciation and Amortisation costs increased to £1.2 million (2015: £0.9 million) reflecting the full year cost of acquisitions made in 2015 together with the increased capital spend on our IT infrastructure.

The effective rate of taxation on profits decreased to 17.4% (2015: 26%) due to the reversal of timing differences within deferred tax and the release of prior year provisions following submission of 2015 tax returns. The underlying tax rate fell to 21.5% compared to the standard rate of 20% as a result of non-deductible amortisation expenditure charged through the Income and Expenditure account.

Earnings attributable to shareholders increased by 43% to £1.7 million and accordingly the directors’ propose an increased dividend of 3.0 pence per share, giving dividend cover of 138% above the dividend to be paid in May 2017.

As discussed above, the Group maintained its strict financial and commercial criteria in assessing potential acquisitions during the year and as a result the majority of the cash raised in December 2015 remained on the Balance Sheet throughout the year. Whilst this had an initial diluting impact on our reported EPS, I am pleased to report that EPS has grown by 20% to 7.16 pence (2015: 5.95 pence)

Capital structure
The Group remains free of secured debt, with the exception of a mortgage held on the freehold property acquired in 2015, and maintains a capital structure that the Board believe provides a conservative level of gearing through Unsecured Corporate Bonds. These bonds currently represent approximately 14% of Shareholder’s equity and their future use is considered by the Board to provide an additional and attractive source of finance with which to enhance the return of equity shareholders in the future.

The Group continues to maintain a net cash position and all regulated subsidiary companies reported significant margins above their regulatory and stress tested capital requirements as at 31 October 2016.

Current year trading
The current year has started in line with trading levels from the second half of 2016. Recurring revenues continue to be in line with the Directors’ expectations, and the Group’s acquisition pipeline remains strong. Since the year end we have announced three acquisitions of IFA companies and our strong cash position will allow AFH to take further advantage of the active M&A market in the IFA sector. In addition we have eleven new advisers joining during the first quarter of the financial year to continue the expansion of our organic model. Whilst these advisers are unlikely to have a material impact on first half figures, the Board is confident that they will contribute to the long term development of AFH and the achievement of its strategic aims in 2017 and future periods.

Alan Hudson

Chief Executive Officer

27 January 2017

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