5 October 2017

Morses Club PLC

Interim results for the twenty-six weeks ended 26 August 2017

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 26 August 2017.

Highlights

·     Strong first half performance with revenue up 14.8% to £54.2m (H1 FY17: £47.2m)

·     Net loan book growth of 16.0% to £65.2m (H1 FY17: £56.2m)

·     Impairment as a percentage of revenue for the period was 26.6% (H1 FY17: 22.5%) remaining within our target range and reflecting our growth plans

·     12.6% increase in customer numbers to 233,000 (H1 FY17: 207,000)

·     Significant increase in territory builds to 434 (H1 FY17: 114), introducing additional high quality customers *

·     Reduced cost / income ratio to 56.4% (H1 FY17: 58.3%)

·     11,100 live Morses Club Cards issued, with loan balances of £4.6m

·     Secured additional funding to increase overall revolving facility from £25m to £40m

·     Adjusted¹ profit before tax up at £8.7m (H1 FY17: £8.6m); reported profit before tax up to £6.7m (H1 FY17: £4.6m)

·     Adjusted¹ EPS 5.3p (H1 FY17: 5.3p); Basic EPS 3.9p (H1 FY17: 2.7p)

·     Interim dividend 2.2 pence per share (H1 FY17:  2.1 pence per share)

Key performance indicators

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

1 Adjusted profit before tax and adjusted EPS are defined in the Financial Review

2 Defined as earnings before exceptional items as a percentage of tangible asset value calculated on a last 12 months basis

3 Defined as earnings before exceptional items as a percentage of tangible equity value on a rolling 12 months basis

4 Calculated on a rolling 12 month basis

5 Tangible equity and asset value excludes £2.7m of capitalised IT costs which are classified as intangibles on the balance sheet

6 This calculation uses the Impairment charge per the income statement which is based on the bad debt write off and movement in the impairment provision

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

"Our strong first half performance demonstrates the success of our credit policy and emphasis on high quality lending, as well as our ability to capitalise on market opportunities to increase our customer base.  In light of the change in market conditions, we have placed considerable emphasis on ensuring that growth is sustainable and we are focused on developing products in line with customer demand and supported by our excellent customer service offering.

"We have made significant progress with our technology platform underpinning the business operationally, whilst retaining the people aspects of the business that our customers value so highly. We have delivered increased quality revenue and loan book growth, whilst keeping impairments within our target range, giving 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:

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 lender with 233,000 customers and 2,124 agents across 98 locations throughout the UK.

The Company offers a range of loan products to its customers through its extensive 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 above.

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 consumers.

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 2009, unsecured personal lending has grown from £161 billion to £244 billion in 2015.

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 via self-employed agents 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 3 million people using the services of UK HCC lenders, of which between 1.5 million and 2 million people borrow regularly.

Chief Executive's Statement     

The first half of this year has seen continued progress with revenue increasing by 14.8% to £54.2m (H1 FY17: £47.2m) and net loan book growth of 16.0% (H1 FY17: £56.2m). We achieved a 24.7% increase in total credit issued to £82.3m (H1 FY17: £66.0m) through a combination of new territory builds and core business growth, with an increase in customer numbers of 12.6% to 233,000 (H1 FY17: 207,000). 

Strategic Growth Initiatives

Recent changes in market conditions have presented an opportunity for us and have resulted in a significant increase in the number of territory builds we have successfully undertaken during the period, whilst maintaining our selective approach to bringing agents on-board.

Territory builds are particularly attractive as they offer a source of high quality loan books and repeat customers and a low cost means of customer acquisition. At 26 August 2017, we had 434 active territory builds (builds commenced in the last 12 months) and these territory builds are performing ahead of expectations.  We have seen a significant uplift in total credit issued, whilst our impairment / revenue ratio was 26.6% for the period (H1 FY17: 22.5%), still within our target range demonstrating the quality of this growth. Our focus on higher quality lending has resulted in a continued increase in the proportion of gross loan balances being attributable to our highest quality customers of 7% (H1 FY17: 7%).

Initial subsidies to agents to maintain their level of income during the first year mean that it can take up to 12 months for territory builds to generate a profitable outcome; however they represent a source of long-term growth and are not expected to adversely impact earnings in FY18 due to their better-than-expected performance to date.

Whilst we have been focused on the growth of the business, good customer outcomes remain at the heart of what we do.  Ensuring high customer satisfaction is a critical component of our organic growth strategy as word of mouth and personal recommendations play an instrumental role in attracting new customers. Our customer feedback shows satisfaction levels are consistently at 95% and above, underlining the importance of retaining the highest quality agents.

Although we believe that the development of the regulatory landscape provides a compelling opportunity for market consolidation in the longer-term, we are only focused on acquiring loan books that will be accretive to our existing business.

New Product Development

We recognise that our customers' needs are evolving and we remain committed to introducing a range of products to support the changing requirements of our customers, as well as keeping Morses Club at the forefront of the HCC sector and wider non-standard consumer finance sector in general.  The significant investment we have made in our technology platform has enabled us to develop our digital offering for customers and align us more closely with the way our customers increasingly utilise digital products.

The Morses Club Card, our cashless lending product, gives our customers increased flexibility in the way they borrow from us and enables them to buy on-line, as well as on the high street.  The card has become increasingly popular, and we have reached our targeted numbers with c11,100 cards in circulation and loan balances of £4.6m (H1 FY17: c5,000, £1.6m), and we expect continued growth in H2. 

In March 2017, we launched the new brand of Dot Dot Loans, our online instalment product, with a clear strategy to test the market and tailor the offering to the online customer demographic.  A full brand and product development strategy is underway, with the objective of ensuring that loans are affordable and flexible, with clear pricing and no hidden fees for the customer.  Management expect that H2 will require a slightly larger investment than H1 FY18.

Technology Developments

Advancements in technology are driving efficiencies in the business and have significantly improved our managers' ability to service more customers by removing paperwork and automating processes.  We have now embedded a full customer affordability platform, which captures key evidence of income and which helps to ensure that any loan offered to a customer is affordable. Further developments are planned in H2, to link this information with Credit Reference Agencies and streamline the KYC process further.

Management data is now fully integrated onto a single platform for our field and central staff, allowing them to focus on customer service, rather than administration.  Plans to deliver remote payments through a Chip and Pin solution are fully developed and will launch across the operation in H2. 

The Company's website has maintained consistent traffic volumes at over 512k visits during H1.  Mobile represents c.78% of all traffic on the website, demonstrating the importance of a digital strategy to support customer communication and brand traction in the market.

Dividend

As a result of the strong first half performance, which saw significant increases in both revenue and net loan book growth, the Board is delighted to declare an interim dividend of 2.2p per share (H1 FY17: 2.1p).

The dividend of 2.2p per share will be paid on 19th January 2018 to ordinary shareholders on the register on 29th December 2017.

Outlook

During the first half of the year, Morses Club has capitalised on changing market conditions to significantly grow territory builds, selectively investing in experienced agents and building a strong source of high quality and long-term growth for the business. The quality of our customer base continues to improve and will drive increasing revenues and credit issued going forward. 

Investment in our technology platform is proving successful, freeing up agents and managers to focus on serving more customers, whilst the Morses Club Card and Dot Dot Loans products are both well placed to move into their next phases of business development.

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

Paul Smith
Chief Executive Officer
Date: 5 October 2017

Financial Review

1 Amortisation of acquired customer lists and agent networks

2 Adjusted profit before tax and adjusted EPS figures have been presented within the interim report as the directors believe they are more representative of the underlying operations of the business

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

4 Adjusted EPS reflects adjusted profit after tax divided by weighted average number of shares (note 6)

Reported profit before tax increased by 45.6% to £6.7m (FY17: £4.6m).  Adjusted profit before tax increased by 1.2% to £8.7m (FY17: £8.6m). This includes start-up losses in relation to Dot Dot Loans of £0.3m. The adjusted profit before tax excluding Dot Dot Loans and the investment cost of territory builds rose to £10.9m (FY17: 9.2m), reflecting an underlying increase of 18.5%.

Revenue for the twenty-six-week period ended 26 August 2017 increased by 14.8% to £54.2m (H1 FY17: £47.2m).  This was driven by a 24.7% increase in total credit issued to £82.3m (H1 FY17: £66.0m), largely related to territory builds. Customer numbers increased by 12.6% to 233,000 (H1 FY17: 207,000).

The total impairment charge increased to £14.4m and as a ratio to revenue to 26.6% for the period (H1 FY17: 22.5%). Management believe that this reflects the rapid increase in newer customers rather than a fundamental reduction in customers' ability or willingness to repay. Whilst it remains within our target range of 22.0% to 27.0% of revenue, this range was based on more modest growth levels and with the higher sales typical of the second half of the financial year, indicators suggest that we may marginally exceed this range for the current year. Despite this, the contribution from the loan book (Revenue less Impairment) demonstrated very good progress, increasing by 8.7% to £39.8m (FY17: £36.6m) and on a rolling 12-month period we saw a 7% (H1 FY17: 7%) increase in the proportion of high quality customer balances in our gross loan book. The average customer balance of £549 is substantially unchanged from £553 twelve months ago. 

Agent commission (excluding territory build subsidies) was up from £10.2m to £11.2m, an increase of 9.8% which was slightly lower than the increase in cash collections of 12.7%. This improvement largely relates to the restructure of the employed agent role out of the business, with most individuals later returning on a self-employed basis.  Territory build costs increased significantly to £1.9m (H1 FY17: £0.6m) reflecting the significant increase in activity. This represents 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. This level of cost is expected to continue at around or slightly above this level for the remainder of the current financial year.

Gross profit was up 4.0% from £25.7m to £26.7m for the period even after the significant increase in the costs of territory builds.

Total costs (excluding exceptional costs and amortisation of acquisition intangibles) as a percentage of revenue decreased to 56.4% from 58.3%. Within this, administration expenses (excluding non-operating costs) increased to £17.6m from £16.6m, however this is a reduction to 32.5% from 35.2% of revenue, a further efficiency gain of 7.7%.

Exceptional costs were £1.0m for the period, due mainly to the restructuring of employed agents originally from acquisitions (H1 FY17: £2.1m due to the cost of IPO).

Regulatory Update

In May 2017, Morses Club received full Financial Conduct Authority ("FCA") authorisation, following a period of operating under interim permission.

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 26 August 2017, the Company had drawn £17.0m of this facility (27 August 16: £8.5m).  The Directors expect this to increase during the second half of the year in the run-up to Christmas, which is the peak lending 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 25 February 2017. 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 2017 the Company has access to a £40m revolving asset based credit facility (H1 FY17: £25.0m), 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 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 12 of these financial statements.

By order of the board:

Andy Thomson
Chief Financial Officer

Date: 5 October 2017

Registered Office:
Kingston House
Centre 27 Business Park
Woodhead Road
Birstall
Batley
West Yorkshire
WF17 9TD