Shore Capital Group Limited: Interim results for the six months ended 30 June 2013

Shore Capital Group Limited

("Shore Capital", the "Group", or the "Company")

Interim results for the six months ended 30 June 2013

Shore Capital, the independent investment group specialising in equity capital markets, principal finance and alternative asset management, today announces its interim results for the six months ended 30 June 2013.

Financial highlights

• Revenue  unchanged at £17.8 million (2012: £17.8 million); revenue excluding Spectrum is up 4.1%
• Profit before tax up 123.2% to £3.3 million (2012: £1.5 million)
• Earnings per share up 72.9% to 0.83p (2012: 0.48p)
• Interim dividend per share of 0.40p (2012: nil)
• Balance sheet remains strong with liquidity of £33.9 million, plus a further £20 million working capital facility that was unused at the period end

Operational highlights

• Equity Capital Markets operations continued to perform well, increasing pre-tax profits by 8.1% to £3.07 million (2012: £2.84 million)
• Named by Thomson Reuters StarMine as Europe's third most productive broker for 2013
• Corporate finance now has 65 retained clients. Secondary commission revenues increased by 11% compared to the same period in 2012
• Puma Investments brand established, targeting private investors, receiving FCA authorisation in May 2013
• Puma VCT 9 raised £28.1 million, the largest of its kind in the 2012/13 tax year. Puma VCT 10 is in its initial launch phase
• Spectrum Investments purchased balance of outstanding loan stock in DBD from Intel Capital; Shore Capital increased its ownership of Spectrum to 59.3%

Commenting on the results, Howard Shore, Executive Chairman, said:

"The continued strength of our business demonstrates that confidence is beginning to return to the economy as more clients look to raise development capital and seek to engage with innovative, service-orientated advisers.

"Based on the solid trading across the Group and the many exciting opportunities ahead, the Board looks to the future with confidence."

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About Shore Capital
Shore Capital is an AIM quoted independent investment group. Founded and owned by entrepreneurs, for nearly three decades Shore Capital has been helping entrepreneurial businesses reach their full potential, find committed long term investors and develop into significant enterprises. The business offers innovative corporate advice; a leading market-making business; some of the most respected investment research available in the UK; and a diverse range of high quality investment opportunities, including its hugely successful VCTs and principal finance activities. It is a business founded on four simple values - integrity, drive, competence and trust.

The Group is based in Guernsey, London, Liverpool, Edinburgh and Berlin. Shore Capital Stockbrokers Limited, Shore Capital and Corporate Limited, Shore Capital Limited and Puma Investment Management Limited are each authorised and regulated by the Financial Conduct Authority.  Shore Capital Stockbrokers Limited is a member of the London Stock Exchange.

www.shorecap.gg

Chairman's Statement

Introduction

I am pleased to report that the Group has continued to make progress. Our businesses have performed well by offering a compelling mix of strong advisory capabilities, excellent execution and a range of products and services which deliver exciting opportunities for investors. The confidence and optimism with which our people have tackled the market's challenges is demonstrated in our results and I thank them for their continued dedication.  

Revenues for the period (excluding Spectrum and DBD) improved by 4.1 per cent to £17.2 million (2012: £16.6 million) delivering increased profit before tax of £2.9 million (2012: £2.2 million), up 31.8 per cent.  Earnings per share (excluding Spectrum and DBD) increased 17.5 per cent to 0.74p (2012: 0.63p). In addition, Spectrum contributed earnings per share of 0.09p (2012: loss of 0.15p) as a result of the release of historic provisions for potential liabilities within DBD which are no longer required.

In Equity Capital Markets we achieved strong results, with profit before tax increasing 8.1 per cent to £3.1 million (2012: £2.8 million). In Corporate Finance we now have a total of 65 retained clients; and conducted 10 fundraisings for clients. Secondary commissions have advanced by 11 per cent, demonstrating the strength of our broking team's expertise and position as a trusted counterparty. Shore Capital is the third largest market maker on the London Stock Exchange and we are ideally positioned to benefit from an increase in market activity, particularly from the expected pick up in small cap interest which appears to have already started improving.

The Group's Research and Sales team remains one of the most respected in the City and its regional reach into the UK, Ireland and Nordics is valued by some of the UK's leading listed businesses, who turn to Shore Capital for high quality research and investor interaction.

During the period we consolidated our private investor offering under the Puma Investments brand, receiving FCA authorisation in May 2013. Puma Investments holds some of our most exciting investment opportunities, including the market-leading Puma VCT funds and Puma Heritage. The business has a strong pipeline of new opportunities in development and has an exciting future ahead of it.

In Principal Finance, our German telecoms asset, Spectrum Investments ("Spectrum"), continues to offer an attractive solution to the growing bandwidth challenges faced by telecommunications operators in that market. As such, we remain confident that this asset can lead to a profitable realisation in due course. During the period, we participated in a fundraising by Spectrum as a result of which we increased our net economic interest in Spectrum/DBD from just under 30 per cent to 59.26 per cent.

Financial Review

Income and expenditure
Following the increase of our economic interest in Spectrum to 59.26 per cent, the financial information below presents the results for the Group as a whole, with additional analysis of the Group excluding Spectrum/DBD.

Revenue for the half-year was unchanged at £17.8m (2012: £17.8m).

Administrative expenses were down 10.0 per cent at £14.5m (2012: £16.1m) providing an operating profit of £3.3m (2012: £1.7m).

Interest income was £0.15m (2012: £0.15m), whilst finance costs were £0.17m (2012: £0.36m), leading to a net finance cost of £0.02m (2012: £0.21m).

Profit before tax of the Group increased 123 per cent to £3.3m (2012: £1.5m). This includes a profit before tax from Spectrum/DBD of £0.4m (2012: loss of £0.7m). The profit for the half year includes a credit of £1.11m (£0.66m net of minority interests) in respect of historic provisions for potential liabilities of DBD that are no longer required.  

The Group excluding Spectrum/DBD
Revenue for the half-year increased by 4.1 per cent to £17.2m (2012: £16.6m).

Administrative expenses were up 1.2 per cent at £14.3m (2012: £14.1m) providing an operating profit of £2.9m (2012: £2.4m).

Profit before tax increased by 31.8 per cent to £2.9m (2012: £2.2m). The net margin before tax was 16.9 per cent (2012: 13.4 per cent).

Revenue from Equity Capital Markets ("ECM") was £12.6m (2012: £11.6m). Profit before tax from ECM was £3.1m (2012: £2.8m), with a net margin of 24.4 per cent (2012: 24.6 per cent).  Revenue from Asset Management was £3.9m (2012: £4.0m) with a net margin of 20.3 per cent (2012: 12.7 per cent). Balance sheet holdings contributed a net gain of £0.3m (2012: £0.6m).

Basic Earnings per Share
The Group generated earnings per share of 0.74p (2012: 0.63p) excluding Spectrum/DBD. Including the effects of Spectrum/DBD, the Group generated earnings per share of 0.83p (2012: 0.48p).

Comprehensive Earnings per Share
On a Comprehensive basis, the Group generated earnings of 0.93p per share (2012: 0.48p).

Liquidity
As at the balance sheet date, available liquidity was £33.9m (2012: £28.8m), comprising £32.5m (2012: £25.6m) of cash and £1.4m (2012: £3.2m) of gilts and bonds. In addition, we have a £20m working capital facility which was unutilised at the period end.

This liquidity demonstrates the Group's continuing ability to undertake a range of transactions as opportunities arise in the near term.

Balance Sheet
Our balance sheet remains strong. Total equity at the period end was £68.0m (2012: £65.2m).

In addition to the £32.5m of cash and £1.4m of gilts and bonds (as referred to above), we held £5.8m in the various Puma Funds, £2.0m net in quoted equities, £0.4m net in the Lily Partnership and a further £1.4m in other unquoted holdings.  In addition, the licence held in Spectrum Investments was valued at £4.2m (on a gross basis, before allowing for minority interests).

The remainder of the balance sheet was £20.3m net, which included £19.8m of net market debtors in our stockbroking subsidiary.

Net Asset Value per Share
Net asset value per share at the period end was 24.9p (2012: 24.4p).

Dividend
Last year, no interim dividend was paid in order that the entire year's dividend (0.5p per share) was received in the 2013/14 tax year with a consequential lower marginal rate of income tax for the higher rate taxpayer.

We are reinstating an interim dividend which for this period will be 0.4p per share (2012:  nil). In addition to this, the Board intends, barring unforeseen circumstances, to pay a final dividend of not less that 0.4p per share which would make a total for the year of 0.8p per share (2012 full year: 0.5p).

The interim dividend of 0.4p per share is expected to be paid on Wednesday, 9 October 2013 to shareholders on the register as at Friday, 27 September 2013.

Operating Review
The following operating review reports on our three main areas of focus, namely Equity Capital Markets,  Alternative Asset Management  and  Principal Finance.

Equity Capital Markets ("ECM")

Overview
In ECM we provide research in selected UK sectors covering 200 companies; broking for institutional and professional clients; market-making in circa 1,200 UK equities - with a strong presence on the AIM market - and corporate finance advisory services for mid and small cap companies.

Following its robust results in the second half of 2012, the division delivered another strong performance in the first half of 2013, achieving a profit before tax of £3.1 million (2012: £2.8 million). Having a strong balance sheet and being viewed as a solid and consistent counterparty by both our clients and market participants is a significant advantage in the current trading environment. Each of the division's operating businesses continued to produce solid revenues and benefit from a diverse range of income streams.

It is pleasing to note that at a time when commissions are declining and the market is consolidating, our secondary commission revenue increased by 11 per cent during the first half of 2013.

The Group's Corporate Finance franchise continues to grow and is now retained adviser to 65 companies. Encouragingly the business enjoys a strong pipeline for the remainder of 2013. Where we identify opportunities for incremental growth in the business, we continue to add senior, experienced individuals and teams. 

Research and Sales
The market for secondary commissions has remained challenging. Nonetheless, the high regard in which the team and its brand is held is demonstrated by our overall growth in market share.

Internal reports from our clients suggest our product is highly regarded by them. This was demonstrated in two recent surveys: firstly the Thomson Reuters StarMine survey in which Shore Capital was named as Europe's third most productive broker for 2013; and secondly the 2013 Thomson Extel survey, in which Shore Capital featured in the top 10 for UK Small & Mid-Cap brokers with nine sectors voted in a top 10 position and five recorded in the top five by fund managers, namely; construction, consumer goods, healthcare, insurance and UK strategy.

We sustained our work to keep investors closely informed of corporate developments with our on-going management presentation series including Astra Zeneca, Diageo, ENRC, Legal & General, Marks & Spencer, Sainsbury's, Spirit and Shire, as well as arranging investor conferences on Shale Energy and Agri-Food.

Market making
We deal directly with the major retail brokers as a Retail Service Provider through a broad range of electronic links, and with a diverse composition of institutions including fund managers, hedge funds and private banks. London Stock Exchange statistics continue to show us to be the third largest market maker by number of stocks covered.

In contrast to some of our competitors, our market-making team has experienced a marked increase in both trading volumes and revenues generated during the first half of 2013, compared to previous periods.

Facilitating client business remains the team's central focus and we are ideally positioned to benefit from increased market volumes as a result of an economic recovery, together with recent changes allowing AIM stocks to be included in ISA portfolios and the forthcoming removal of stamp duty on AIM shares in April 2014.

Corporate Finance
The increased level of corporate finance and corporate broking activity during 2012 has continued into 2013. Whilst there has been a reduction in corporate activity within the natural resources sector, we have seen a significant increase in the activity of our corporate clients in other sectors including real estate, financial services and support services.

The corporate team has to date raised a total of approximately £90 million for clients in 10 separate fundraisings, including a placing to raise £20 million for Telford Homes plc; a £25 million placing for Randall & Quilter Investment Holdings Limited; and advising on the US$26 million reverse takeover acquisition for Zoltav Resources Inc., which simultaneously raised US$20 million. The corporate team also advised RGI International Limited on its US$340 million takeover, which was announced in January 2013 and, after the end of the period, advised Serviced Office Group plc in relation to its placing to raise £12 million of new equity to fund the acquisition of Avanta Managed Offices Limited for £15 million and Wynnstay Group plc on its £9 million placing.

The team continues to achieve success in growing its retained client list. In total we are now retained adviser to 65 companies.

Alternative Asset Management

Overview
The asset management division continues to explore innovative new products to build on its established institutional and retail fund platforms.  Total funds under management as at 30 June 2013 were £0.91 billion, compared to £0.87 billion at 31 December 2012.

Institutional Asset Management

St Peter Port Capital ("SPPC")
St Peter Port Capital is a pre-IPO fund which also provides bridging finance ahead of trade sales and is an opportunistic investor in development capital situations.   At its year end of 31 March 2013 it had investments in 39 companies and a NAV per share of 111.8p, an increase of 5.5 per cent on the year and 8.2 per cent since 30 September 2012.

During the period, SPPC made a further realisation of its holding in Iona Energy, a Canadian listed oil and gas company operating in the North Sea, generating CAD$1.89 million.  SPPC made a number of new investments, including a £500,000 investment in Nektan Limited, a software developer in the growing mobile and online gaming industry.  In addition, it made several follow-on investments during the period, including a US$938,000 investment in Brazil Potash, which owns a potash mine in Brazil and which is investigating a flotation on Brazil's BOVESPA, a C$250,000 investment in Homeland Uranium, an exploration company with uranium prospects in Niger, and a £110,000 investment Astrakhan Oil, a Russian based oil development company.

The SPPC portfolio of companies continues to develop well.  Over the last year, several of the oil/gas and mineral holdings have demonstrated through discoveries significant further increases in the value of the deposits they are developing.  These offer the possibility of further large gains on exit.

Puma Brandenburg Limited ("PBL")
PBL's strong operating performance has continued in the period and revenue growth is expected to continue following rent increases applied in the Berlin residential portfolio as a result of increases in the Mietspiegel, the local index which controls the amount by which rents can be raised in certain apartments.  

PBL actively manages its assets which are situated in prime locations.  It has recently completed the refurbishment works for the existing hotel tenant Accor in Nuremberg where a 20 year lease had been signed and the Hyatt Hotel in Cologne is performing strongly following its extensive refurbishment.  Elsewhere in the portfolio, structural vacancy rates have been maintained at low levels and its successful modernisation programme continues to drive rental growth and the quality of its residential properties in Berlin.  

It remains focused on value enhancing asset management initiatives and particularly on extending debt that matures next year to provide long term finance for the strong portfolio of assets.

Puma Hotels plc ("PHP")
PHP's final results for the year ended 31 December 2012 covered a period which saw significant changes to its operations. As previously reported, the leases with Barceló Hotels and Resorts were terminated on 25 April 2012 and since that time the hotels have been operated by PHP. Since taking over the hotel operations, the existing hotels team has been augmented through a number of senior appointments and, despite trading conditions remaining challenging for provincial UK hotels, the PHP team, with Shore Capital's assistance, has been effective in mitigating the challenges that arise in taking over a business of this scale. 

PHP generated a profit in 2012 of £10.5 million for the year. This return to profitability was driven by the net lease termination fee of £20.3 million received from Barceló. The receipt of this termination fee allowed PHP to reduce its senior debt facility by approximately £20 million.  

As at 28 June 2013, PHP successfully completed the extension of its £323 million senior debt facility with Irish Bank Resolution Corporation in Special Liquidation ("IBRC"). New terms have been agreed with IBRC until 30 May 2014 with revised covenants to reflect the current operating environment.

Puma Sphera
Following the decision by its largest shareholder to redeem its holdings in Puma Sphera as it had decided that it preferred to access Puma Sphera's investment strategy through a private managed account as opposed to through a fund structure, the Board of Puma Sphera determined to liquidate the fund as the remaining assets under management resulted in the fund being sub-scale and uneconomic.  Following the redemptions of shares, several shareholders elected to transfer their interests to the mirror fund of Puma Sphera, namely Sphera Fund LP.  

Puma Venture Capital Trusts ("VCTs")
The on-going effects of the credit crisis mean that SMEs are still finding it difficult to access the funding they need from traditional lenders. Our VCTs seek to meet that demand and focus on providing secured loans to well-run companies. In particular, we are seeing many established businesses which have substantial assets or predictable revenue streams, over which a first charge can be taken, thereby reducing the risks usually associated with venture capital investing.  Our VCTs are each limited-life vehicles, aiming to distribute the initial capital and returns to their investors after five years.  

Our market-leading VCT track record is reflected in the fact that the early Puma VCTs were the first limited-life VCTs to have reached the milestone of returning 100p per share in cash distributions to shareholders and Puma VCTs 1 to 4 have each produced the highest total return of their respective peer groups. Since 2005 over £130 million has been raised for Puma VCTs, and more than £60 million has been distributed as dividends to shareholders.

Puma VCT 9 closed during the period raising over £28.1 million, making it the largest single company VCT fundraise in the 2012/13 tax year and accounting for over 10 per cent of the total funds raised in the VCT market in that year (excluding enhanced share buy-backs). We consider this fund-raising to be a considerable achievement and an endorsement of our standing in the VCT sector.  We are pleased to be launching our tenth VCT for the current tax year and hope to capitalise on our excellent track record.

Puma Heritage plc
Puma Heritage was launched in June 2013 seeking minimum investments of £100,000 to operate in a range of sectors, with a primary focus on secured lending. Puma Heritage will focus on capital preservation, whilst seeking to produce regular returns for shareholders intended to counter long-term inflationary pressures. It is anticipated that Puma Heritage will expand into other activities as opportunities arise. In particular, the Board of Puma Heritage envisage that it will offer asset leasing services, as well as, in the medium to long term, purchasing and operating profitable trading businesses with asset-backing and established management teams. An investment in Puma Heritage is intended to benefit from 100 per cent relief from Inheritance Tax after two years. Puma Investments has been appointed as the trading adviser to Puma Heritage to advise the company in executing its business strategy.  

Puma EIS
Puma Investments will launch in the second half of the year a portfolio service offering investors the opportunity to invest in asset-backed EIS qualifying companies utilising the team's strong track record and experience in asset-backed investing gained over the life of the first nine Puma VCTs.  We are excited about the prospects for our Puma EIS based on the demand for EIS investments which can provide downside protection through asset-backing.  

Principal Finance

Investment in German Telecoms Business

DBD holds radio spectrum licences in Germany in the 3.5 GHz range which is increasingly being deployed around the world for providing 4G mobile services. The German mobile market is the largest in Europe, with circa 115 million subscribers recorded in 2012 generating the largest sector revenues in Europe. As in other European mobile markets, the deployment of 4G in Germany continues to drive revenue growth as subscribers demand greater levels of data capacity. DBD's spectrum is ideally placed to provide mobile operators in Germany with additional data capacity for smart phones and tablet devices.

Spectrum acquired its original interest in DBD in March 2011. The other two 3.5 GHz licences in Germany were recently acquired by E-Plus, the fourth largest mobile operator in Germany.

In early 2013, Spectrum raised €3.3 million of new capital from its investors, including Shore Capital, to fund its acquisition of further loan stock and equity in DBD. As a result Spectrum now holds, directly and indirectly, substantially all of the economic interest in DBD. Shore Capital invested €2.13 million in the Spectrum fundraising and now holds 59.26 per cent of Spectrum.

As part of the refocusing of DBD's business that was anticipated at the time of the original acquisition, DBD's consumer business has been reducing and will cease at the end of September 2013. Following the cessation, ongoing basic operating costs are anticipated to be reduced to approximately £0.5 million per year.

The consolidated profit before tax in the period arising from this investment was £0.4 million (2012: loss of £0.7 million). The profit for the half year includes a credit in respect of the release of historic provisions for potential liabilities within DBD which are no longer required. This has contributed £0.66 million to the Group net of minority interests.

We remain confident that this asset can lead to a profitable realisation in due course.

Current Trading and Prospects

The continued strength of our business demonstrates that confidence is beginning to return to the economy as more clients look to raise development capital and seek to engage with innovative, service-orientated advisers.  Based on the solid trading across the Group and the many exciting opportunities ahead, the Board looks to the future with confidence.

We anticipate that the ECM business will benefit from the improving economic climate coupled with the renewed interest in AIM, fuelled in part by the recent change in law allowing investors to hold AIM stocks in their ISAs.  Our highly regarded research and sales team are well placed to continue to capitalise on their recent success in external surveys, including the Thomson Reuters StarMine survey in which Shore Capital was named as Europe's third most productive broker for 2013.

We are also excited about the new investment opportunities being developed by the asset management division, including the launch of Puma VCT 10 and Puma EIS which build upon our excellent track record in asset-backed investing.

Howard P Shore
Executive Chairman
16 September 2013

Independent review report to Shore Capital Group Limited (the "Group")

We have been engaged by the Group to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2013 which comprises the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated cash flow statement and related notes 1 to 9. We have read the other information contained in the in the half-yearly 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 Group in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Group 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 half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report as required by the AIM rules issued by the London Stock Exchange and the Bermuda 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 half-yearly 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 Group a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review
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 Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, 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 Ireland) 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 half-yearly financial report for the six months ended 30 June 2013 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
Chartered Accountants
Guernsey, Channel Islands

16 September 2013

Consolidated Income Statement
For the six months ended 30 June 2013 (unaudited)

Consolidated Statement of Comprehensive Income
For the six months ended 30 June 2013 (unaudited)

Consolidated Statement of Financial Position
As at 30 June 2013 (unaudited)

Consolidated Statement of Changes in Equity
For the six months ended 30 June 2013 (unaudited)

  

Consolidated Statement of Changes in Equity (continued)
For the six months ended 30 June 2013 (unaudited)

Consolidated Cash Flow Statement
For the six months ended 30 June 2013 (unaudited)

Notes to the Interim Financial Report
For the six months ended 30 June 2013 (unaudited)