Knights Group Holdings plc
("Knights" or the "Group")
Full Year Results
A strong performance as we continue to build a resilient business of scale
Knights, one of the UK's fastest growing legal and professional services businesses, today announces its full year results for the year ended 30 April 2020.
Financial highlights(1)
· Revenue increased by 41% to £74.3m (2019: £52.7m), including 10% organic revenue growth
· Underlying PBT(2) rose by 45% to £13.6m (2019: £9.4m restated for IFRS 16; £9.8m reported)
· Underlying PBT(2) margin of 18.3% (2019 restated for IFRS 16: 17.9%)
· Underlying EPS(3) increased by 27% to 14.33p (2019: 11.31p restated for IFRS 16; 11.88p reported). Basic EPS of 2.44p (2019: 5.27p restated for IFRS 16; 5.84p reported)
· Strong cash conversion (4) of 80% (compared with exceptional performance in 2019: 137% restated for IFRS16), following a year of significant investment and reflecting lock up in recent acquisitions
· Lock up was 85 days excluding the impact of acquisitions (2019: 88 days), aided by robust systems for and a strong culture of day-to-day cash collection
· Net debt of £15.9m was ahead of market expectations after a £3m outflow in respect of all acquisition consideration (including deferred) net of the £20m placing proceeds (30 April 2019: £14.1m)
· No final dividend proposed, as previously announced. Total dividend will consist of the interim dividend of 1.10p per share (2019 total dividend: 1.87p per share)
Strategic and operational highlights
· Strong recruitment and continued investment in building a platform for future growth
o Recruited a net 108 fee earners in the year (2019: net 46 fee earners)
o Established a leading national employment team - including recruitment of recognised leaders in this field from other Top 50 law firms
o Recruited 15 operational staff; six operational directors (including an operations director, a recruitment director, and two client service directors) and a compliance manager
o Entered York with a new office opening, expanded to new offices in Manchester and invested in increased capacity in Oxford
· Broadened our geographic coverage as we scale throughout the UK
o Entered the major legal markets of Birmingham, Leeds and the South East via the acquisitions of EGL and ERT, Shulmans, and ASB respectively
o Added defensive housing association specialism in Manchester and scaled the Group's presence in the East Midlands with the acquisitions of Croftons and Fraser Brown respectively
COVID-19
· Early cost saving actions positioned the Group well to trade through the current environment; ability to act swiftly demonstrated the benefit of a corporate structure
· Lawyers continue to deliver outstanding service to clients, with no impact on Knights' ability to transact
· Resilient and diversified model benefitted the Group during lockdown
· A strong balance sheet with a conservative gearing level and good liquidity following the recent placing to raise £20m and £40m extended revolving credit facility
Current trading and outlook
· Early signs of a recovery in market conditions compared with the disruption experienced at the beginning of April
· Integration of recent acquisitions ahead of expectations
· Near term focus on embedding recent acquisitions and recruitment from a strong pipeline of senior fee earner candidates, who typically bring a client following
· Beyond the near term, COVID-19 is expected to accentuate the pipeline of recruitment and acquisition opportunities
· Confident of emerging in a stronger position from this current environment
David Beech, CEO of Knights, commented:
"We have delivered a year of strong, profitable, cash generative growth and demonstrated progress in line with our strategy to complement organic growth with carefully targeted acquisitions.
"Our recent investments in systems, people and through acquisitions provide the Group with the benefits of scale and resilience, positioning it well for a recovery in our markets.
"Whilst the market remains uncertain, we are pleased to see early signs of a recovery and the current year is expected to benefit from the full year effect of prior year acquisitions and our continued momentum in recruiting high calibre talent, many from other Top 50 law firms.
"Beyond the near term, we anticipate that COVID-19 will only accentuate the recruitment and acquisition opportunities for our resilient, well-invested, diversified and cash generative business in the highly fragmented and often under-invested market for legal services outside London."
The Board believes that these adjusted figures provide a more meaningful measure of the Group's underlying performance. These definitions apply to all equivalently numbered footnotes throughout the announcement. A more detailed explanation of the Group's alternative performance measures used in this report is included in the appendix.
(1) 2019 figures have been updated to reflect the impact of IFRS16. All movements from 2019 to 2020 have been calculated based on the IFRS16 comparable figures
(2) Underlying PBT is calculated before amortisation of acquired intangible assets; non-underlying costs relating to the placing, acquisitions and restructuring, contingent consideration payments, non-recurring finance costs, share based payments related to the IPO and acquisitions and is provided on an IFRS 16 basis in the prior period.
(3) Underlying EPS is calculated from profit after tax by adding back amortisation of acquired intangible assets, non-underlying costs relating to the placing, acquisitions and restructuring, contingent consideration payments, non-recurring finance costs and share-based payment charges related to the IPO and acquisitions and the tax in respect of these costs and it is provided on an IFRS 16 basis in the prior period.
(4) Cash conversion is calculated as the total of net cash from operations, tax paid and payments of lease interest and lease finance liabilities under IFRS 16 for periods from 1 May 2019, divided by the underlying profit after tax, which is calculated from profit after tax by adding back amortisation on acquired intangible assets, non-underlying costs and finance costs, contingent consideration payments, share-based payment charges related to the IPO and acquisitions and the tax in respect of these costs.
A presentation of the full year results will be made to analysts via a webinar at 9.30am today. To register interest in attending, please contact Robert Collett-Creedy at MHP Communications on 020 3128 8147 or email knights@mhpc.com.
Ends
Enquiries
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Knights |
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David Beech, CEO |
via MHP Communications |
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Numis (Nominated Adviser and Broker) |
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Stuart Skinner, Kevin Cruickshank |
020 7260 1000 |
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MHP Communications (Media enquiries) |
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Andrew Jaques, Katie Hunt, Rachel Mann |
020 3128 8549 07585 301464 |
Notes to Editors
Knights is a fast-growing, legal and professional services business, ranked within the UK's top 100 largest law firms by revenue. Knights was one of the first law firms in the UK to move from the traditional partnership model to a corporate structure in 2012 and has since grown rapidly. Knights has specialists in all key areas of corporate and commercial law so that it can offer end-to-end support to businesses of all sizes and in all sectors. It is focussed on key UK markets outside London and currently operates from 13 offices located in Birmingham, Cheltenham, Chester, Crawley, Leeds, Leicester, Maidstone, Manchester, Nottingham, Oxford, Stoke, Wilmslow and York.
Chairman's Statement
Knights has delivered another strong performance as it grew organically and by acquisition, in line with our strategy to build the leading legal and professional services business outside London.
Revenue increased by 41% to £74.3m (2019: £52.7m). This reflected 10% or £5.2m of organic growth, aided by the recruitment of 108 new, high calibre fee earners. It also includes a £10.5m contribution from the six carefully selected acquisitions made during the year, which substantially broadened our geographical reach and depth of expertise, as well as £5.9m relating to the full year effect of prior year acquisitions.
The Group's on going focus on profitable growth enabled us to improve underlying PBT(2) margin to 18.3% (2019,(1,2): 17.9%), resulting in a 45% increase in underlying profit before tax(1,2) to £13.6m (2019(1,2): £9.4m) and a 27% increase in underlying EPS(1,3) to 14.33p (2019(1,3): 11.31p).
Importantly, this strong performance was achieved whilst substantial investment was also made in the operational backbone of the business, in the first half in particular, with a focus on growing operational leadership, technology and office upgrades, as well as increased automation. This investment is already being leveraged, making possible the significant organic and acquisitive expansion during the year.
This investment, combined with our culture and strong business model, is enabling us to continue to deliver industry-leading working capital management, fee earner productivity and colleague retention, which underpin the building of a sustainable business for the future.
A distinct business model and culture
Having been the first business of our type to corporatise in 2012, Knights is a modernised and well-invested legal services business that operates as one team on a common process, data and technology platform. This enables the team to work together collaboratively and with the agility to efficiently match the right specialist expertise to clients' needs. Since we were already operating in a paperless way, it also meant that the team has been able to transition seamlessly to working from home, with our ability to transact unaffected.
Unlike many legal service providers that focus on the performance of individuals, Knights fosters a highly collegiate culture where we always work in the best interests of our clients and the success of the Group as a whole. Central to this, is that there are no fee earner targets. We take a proactive approach to serve clients as one team, so clients receive the best quality service and value, whilst allowing all of our team to develop and thrive. This unique culture combined with the quality of clients and work, means we are able to attract and retain the highest calibre of legal talent.
A strengthened and diversified platform
Following ongoing recruitment and the acquisitions made since our IPO, we now have over 930 fee earners operating from 13 locations outside London (up from 350 and 6 respectively at IPO). We now serve over 18,000 clients, including over 25 FTSE100 companies (or equivalent by market capitalisation).
The expansion of our geographic reach and client base, with an average matter size of c.£3,000, together with integrating acquisitions into existing locations, has reinforced Knights' resilience, leaving us relatively well placed in the face of current uncertainty. It has also left us even better balanced for the different stages of the economic cycle, having strengthened the depth and breadth of our expertise across our core areas of Real Estate, Dispute Resolution, Corporate, Employment and Private Client.
In this context, our investments during the year are strengthening our competitive advantage in a highly fragmented market through our greater capacity to deliver a broader range of high quality and good value services closer to our clients, as their trusted partner.
Environmental, social and governance matters
The Board recognises the importance of our role in environmental, social and governance matters ("ESG"). To reinforce the importance our business places on ESG, we have appointed one of Knights' non-executive directors, Jane Pateman, as the Board member responsible for driving our initiatives in this area across the Group.
Current trading and COVID-19 update
The health and wellbeing of Knights' people has always been the Group's priority and all of our employees have been working from home since 13 March 2020, ahead of the UK government lockdown due to COVID-19.
Our focus on flexible working and business continuity, supported by our previous investments in secure, robust technology have enabled our team to work effectively from home and continue to deliver outstanding client service.
As announced on 26 March, we moved quickly to put in place a number of prudent cost saving measures in relation to the uncertainty created by COVID-19 that do not compromise the prospects of the business in the medium to long term. This ability to act swiftly demonstrated the benefit of a corporate structure in which the senior leadership was able to act with agility whilst supporting its lawyers to remain focused on delivering value to clients. These measures included stopping or deferring all non-essential capital expenditure, eliminating discretionary spend, reducing Board salaries by 30% and the salaries of all staff earning over £30,000 by 10%, and making staffing reductions to reflect a more prudent approach to resourcing.
These early actions have positioned the Group well for the current market environment, albeit it remains difficult to predict the impact on the activity levels of our clients. As a result, the Board believes it would not be appropriate to provide forward looking financial guidance to investors and analysts at this time. However, whilst the market remains uncertain, we are encouraged that early signs of a recovery in instructions indicate an initial improvement in market conditions compared with the disruption experienced at the beginning of April.
We remain confident in the Group's resilient business model, with our full service offering and geographic reach supporting a highly diversified revenue and client base, industry leading working capital management, and advantageous market positioning. These strengths, together with a strong management team, will see Knights emerge from the near term uncertainties in a strong position in its market.
Balance sheet and liquidity
The Group has a strong balance sheet with a conservative gearing level, good liquidity, and is highly cash generative. Having conducted robust stress testing, we are confident that it is in a strong position to trade through this uncertain period and beyond.
Dividend
The Board has decided it is not appropriate to recommend paying a dividend given the recent cost saving measures put in place in relation to COVID-19.
Summary and medium term outlook
Our resilient business model, combined with a strong financial position and being both well invested and cash generative, provides us with a robust platform from which to build upon Knights' unique proposition in the highly fragmented and often under-invested market for legal services outside London.
The Board is, therefore, confident that our talented team will continue to deliver on our long-term strategy to become the leading legal and professional services business outside London, and that the near term challenges for our industry due to COVID-19 will only accentuate our market opportunity in the medium term.
Balbinder ('Bal') Johal
Non-Executive Chairman
21 July 2020
Chief Executive's Review
Introduction
We delivered a year of strong, profitable, cash generative growth and demonstrated progress in line with our strategy to complement organic growth with carefully targeted acquisitions.
This was reflected in both clear momentum in the recruitment of high calibre talent, up 135% on the prior year, which drove organic revenue growth of 10%, and strong contributions from six acquisitions. The acquisitions strengthened our presence in the East Midlands and Greater Manchester, and expanded our footprint into Yorkshire, the South East and Birmingham.
Our investments in operational management, technology and infrastructure, enabled this significant expansion to be executed effectively, with the Group's staff more than tripling since IPO in June 2018 to over 1,100 (or doubling in the last 12 months), and offices expanding from 6 to 13.
The c.400 increase in fee earners and the expansion of our fee earner : support staff ratio to 4.8:1 was significantly ahead of the FY20 aspirations we set out at the time of IPO in June 2018. This has left the Group well placed to take advantage of the £2.6bn addressable market for legal services outside London (source: Bureau van Dyke, Mintel UK Legal Services Report 2019).
Throughout this expansion of the business, we have worked hard to retain and develop the Knights' 'one team' culture which ensures a collaborative approach to providing high quality services to our clients and development opportunities for all of the Group's talent. In turn, our continued high levels of client and colleague retention are a key pillar of our sustained profitable growth.
During the year, our banks and shareholders demonstrated their support for our strategy through a £40m extended revolving credit facility, agreed in February 2020, and a £20m placing which was completed in March 2020 to primarily fund the Shulmans and ASB acquisitions. These left us in a strong financial position as we entered the more uncertain environment created by COVID-19.
In February 2020, Knights also welcomed a significant milestone as we became a constituent of the FTSE AIM 50 which recognises our rapid growth since IPO.
Driving organic growth
We continued to attract high calibre talent during the year, with the strong momentum in recruitment in the first half continuing in to the second half. Overall, 108 new fee earners joined Knights organically during the year, compared with 46 new fee earners in the prior financial year. In addition, 18 senior fee earners have accepted positions and will be joining us in the current financial year.
A significant proportion of these new recruits join from Top 50 law firms looking to further their careers at Knights, which is testament to our reputation for interesting work for a high quality client base and the development opportunities we offer the team. Our business model and culture remains a clear differentiator for many who wish to move away from partnerships and/or work in a modern professional services business. They are primarily attracted by the highly collaborative and agile work environment, as well as the reduced financial risks that are associated with a traditional partnership model.
We have also continued to invest to increase the scale of our operational backbone and geographical reach through new and improved premises. This investment provides an enhanced working environment for existing team members and also attracts further talent to the business.
Following the appointment of Richard King as Chief Operating Officer in January 2019, we have built a robust operational management and support team to enable our growth. During the year we have recruited 15 operational staff; six directors (including an operations director, a recruitment director, and two client service directors) and a compliance manager, which has provided the capability to scale up the business effectively.
Alongside building out the operational team, significant investment was made in the Group's IT and communications infrastructure. This investment has underpinned a system that now offers firm-wide information across one platform. The system has supported our increased headcount and the swift integration of acquired businesses. At Knights we are constantly reviewing and adopting new technology where it will improve efficiency or provide insight to enhance our client service.
A great example of where the investment in premises and platform have delivered for the Group is in Manchester and in York.
During the first half of the year, the team in Manchester relocated into new, larger offices where the improved working environment and more central location has enabled us to grow by 79% to 86 fee earners, (including 16 who joined as part of the acquisition of Croftons). Our growth in Manchester has also added momentum to our nearby Wilmslow office which has grown by 33% to 80 fee earners (since April 2018: 56), necessitating additional space.
In the second half of the year, the Group was able to leverage its existing operating platform to enter York with a new office opening, and a team of 15, including five partners. We have also invested during the year in expanding our capacity in Oxford, providing capacity for up to 200 fee earners.
Acquisitions as a platform for organic growth
We continued to build on our strong track record in selecting and integrating high quality acquisitions with a strong cultural fit that either take the Group in to new key markets or strengthen Knights' service offering in existing locations.
We have an industry leading integration methodology that ensures we deliver value throughout our programme of acquisitions. The methodology ensures clear management ownership of individual transactions and puts in place an experienced support team to migrate acquired businesses onto our IT, payroll, billing and cash collection platforms. Rebranding, onboarding clients and teams, migrating to new platforms, enhancing office environments, securing culture carriers, training, and modernising acquired teams' approach to both delivering and being paid for their legal services have all become very much 'business as usual' tasks for the Group.
As a result of our approach, the Group's prior year acquisitions have all performed well and have provided platforms for further growth in their respective regions during this year.
Strengthening our offering in existing geographies
On 31 January 2020, we completed the acquisition of Croftons Solicitors LLP ("Croftons"), bringing to the Group a specialist housing, regeneration and commercial real estate law firm in Manchester.
Established in the 1840s, Croftons has a strong reputation for a broad spectrum of work and is a trusted adviser to over 50 housing associations, which is typically a very defensive segment of the market with a high proportion of recurring revenues.
Croftons' 33 fee earners have integrated well within Knights, bolstering the Group's presence in Manchester and Wilmslow and broadening its real estate offering. Initial synergies were all delivered as expected and Croftons continues to perform well.
On 27 March 2020, Knights completed the acquisition of Fraser Brown, bringing to the Group one of Nottingham's largest independent law firms.
Established over 250 years ago, Fraser Brown grew to offer a broad spectrum of commercial and private client legal services to clients across the East Midlands, significantly strengthening the Group's presence and breadth of offering in the region.
Its 81 fee earners have integrated well with the Group's existing team in the East Midlands, with initial synergy savings delivered in line with expectations. We plan to build upon our expanded East Midlands presence by combining our current teams in Derby, Lincoln and Nottingham into new offices in Nottingham, providing critical mass in this important market.
Birmingham acquisitions position us well in the important West Midlands market
We entered Birmingham with the acquisition of EGL on 1 November 2019, bringing to the Group one of the only full service commercial independent law firms in Birmingham and further extending Knights' strength in its existing corporate, dispute resolution, real estate and private client service offering.
The Group subsequently expanded its offering further in Birmingham through the acquisition of ERT Law Limited (ERT), a specialist in commercial litigation, servicing a number of blue-chip and listed companies, on 17 January 2020.
ERT added 24 fee earners to the 28 acquired as part of the EGL acquisition, providing us with a significant and high quality platform from which to grow in the important West Midlands region, which is estimated to have a £250m legal services market (source: Bureau van Dyke, Mintel UK Legal Services Report 2019).
Both acquisitions were a strong cultural fit which enabled them to integrate well and they have performed in line with our expectations following the realisation of synergies.
Establishing the Group in the attractive South East market
On 17 April 2020, Knights completed the acquisition of ASB Law LLP, including ASB Aspire LLP ("ASB"), bringing us an entry into the South East with a leading full service commercial law firm in the region.
ASB is a culturally aligned, commercial law firm offering commercial, corporate finance, dispute resolution and employment advice from offices in Crawley and Maidstone, with 89 fee earners and large corporate relationships.
Its ambitious and innovative team has successfully challenged conventional ways of working in the legal sector despite a limited ability to invest for growth. However, they will benefit from investment as part of a broader Group and we expect that our investments in technology and training will allow the full potential of the business to be realised.
The acquisition of ASB provides a platform for growth in the strategically attractive South East market, which is estimated to be valued at £250m excluding London (source: Bureau van Dyke, Mintel UK Legal Services Report 2019).
ASB has integrated well, with initial synergies realised, as anticipated, and we expect to be able to continue to grow our presence in this region given ASB's well located base for the recruitment of high calibre talent, including lawyers who no longer wish to commute to London.
Knights also brings additional expertise, scale and breadth of services to ASB's large corporate relationships (particularly regulatory, tax and intellectual property), whilst we expect to leverage the niche specialisms that ASB brings, e.g. in the aviation sector, across our wider geographical footprint.
Leeds entry provides a strong platform in one of the largest regional markets
On 24 April 2020 we completed the acquisition of Shulmans LLP ('Shulmans'), providing us with an entry into the Leeds market with a leading independent law firm. Having been founded in 1981, Shulmans brought to the Group one of the longest established independent commercial law firms in Leeds, with 90 commercial fee earners operating from a single office. Its full commercial legal services offering includes corporate, litigation, employment and real estate, which is well matched to Knights' existing specialisms.
Shulmans provides Knights with a platform for growth in one of the largest regional markets for legal services in the UK; the Yorkshire market is estimated at £440m (source: Bureau van Dyke, Mintel UK Legal Services Report 2019). It also brings capacity for material organic growth through recruitment, with capacity to expand to up to 225 fee earners, and further bolt-on acquisitions in the region, in time.
Shulmans also brings access to city relationships for our York office, which we recently established organically and we expect the combination of the two offices in this region to be able to replicate Knights' successful strategy for entering the North West market by opening the Wilmslow office organically in May 2017, followed by the acquisition of Turner Parkinson in Manchester in June 2018 with 44 fee earners. The combination of the two offices generated material organic growth opportunities resulting in circa 166 fee earners across the combined offices today, with the Manchester acquisition adding momentum to recruitment efforts in the nearby Wilmslow office. We are working towards a similar outcome for Leeds and York.
Shulmans is culturally aligned to Knights but provides an opportunity to modernise a business which has operated under a more traditional model previously. It has now been integrated, with the significant anticipated initial synergies having been realised, as we continue to enhance its margins through the implementation of Knights' operating model.
The acquisition provides a strong platform in this key market for further organic growth through enhanced recruitment, investment in people and technology, client wins and cross selling.
Market overview
The legal services market in the UK is largely polarised between the major law firms who operate out of London and internationally, with an offering focussed on the largest UK and international clients, high street laws firms focused on consumers, and small to medium sized B2B focused independent law firms, who are often subscale and operate out of a single office regionally, serving businesses typically headquartered outside London. This latter market is our focus.
Our addressable market outside of London is valued at approximately £2.6bn revenue per year, has been growing at a rate of 3-5% annually, and is made up of approximately 160 firms with annual revenues of between £2m - £60m (source: Bureau van Dyke, Mintel UK Legal Services Report 2019).
The majority operate under the traditional partnership model, rather than operating as corporate businesses with a clear division between management and fee earners, and many firms are cash constrained due to high levels of working capital lock up.
Evolving client, regulatory and employee requirements are also putting more pressure on the way these firms operate. Corporates are becoming more demanding as they look for value without compromising on quality of service and scale and the investment and expertise required to meet ever-increasing security, compliance and regulatory standards is growing. Furthermore, there is a growing need to provide ambitious and forward-looking fee earners with the opportunity to do high quality work for exciting clients within a flexible, inclusive and friendly culture.
These market drivers mean that that there is a substantial opportunity for Knights to continue to grow its market share from its current level of 3%. With the benefit of scale and low overheads, we are an attractive choice for clients seeking both City quality work and value, and our unique culture provides excellent opportunities for talented lawyers to fulfil their career choices, underpinning our strong momentum in recruitment.
COVID-19 update and medium term outlook
We are proud of the way in which our people have responded to working from home, as they continue to deliver outstanding service to our clients, without any impact on our ability to transact, and we are planning to continue to work from home until September at the earliest.
We believe our early and prudent actions to manage costs have positioned the Group well to trade through the current environment.
With the benefit of recent acquisitions, we have built upon our resilient business model with a well-balanced, full service offering and highly diversified revenues by client, sector and geography. During lockdown, the benefits of this model were evident, and the integration of recent acquisitions has been ahead of expectations.
Whilst the market remains uncertain, early signs of a recovery in instructions across the Group provides an initial indication that market conditions have started to improve compared with the disruption experienced at the beginning of April.
In the near term, our focus is on further embedding fee earners from recent acquisitions and on recruiting senior fee earners, who typically bring a client following.
We are seeing a high level of quality recruitment opportunities with a strong pipeline of candidates, many of whom come from Top 50 firms, as they consider a move away from traditional partnerships.
Beyond the near term, we anticipate that COVID-19 will only accentuate the recruitment and acquisition opportunities for our resilient, well-invested, diversified and cash generative business in the highly fragmented and often under-invested market for legal services outside London.
We are, therefore, confident that our model and culture will enable us to emerge in a stronger position from this current environment, underpinning the Board's confidence in the Group's medium to long term success.
Lastly, and most certainly not least, I would like to pass on a sincere thanks to the Board, to the leadership team and to all my colleagues at Knights for their continual hard work, support and fantastic contribution this year in delivering a strong set of results and achieving considerable further strategic progress.
David Beech
Chief Executive Officer
21 July 2020
Financial Review
I am pleased to report strong performance for the Group in the financial year, despite suffering from the economic impact of the COVID-19 pandemic during April, which historically is the strongest trading month for the Group. We have continued to build on our historic strong track record of growth in both turnover and profitability over the past six years with a further 41% increase in turnover and a 45% increase in Underlying Profit Before Tax (PBT)(1,2).
Our continued focus on cash flow has resulted in strong cash conversion(1,4) of 80% for the year, with net debt being lower than expected, positioning the Group well to deal with the current economic uncertainty from the impacts of the COVID-19 pandemic and to continue with our future growth strategy via recruitment and carefully selected acquisitions.
Revenue
Reported revenue for the period was £74.3m compared with £52.7m in 2019 representing a 41.0% increase.
Of this increase 20%, or £10.5m, was a result of the acquisitions made during the financial year, £5.9m relates to the full year impact of acquisitions made in FY19 with the balance coming from organic growth. The Group achieved strong organic revenue growth, of £5.2m (10%), which is testament to our commitment to continue to strengthen our core business. The organic growth is primarily a result of the increased fees from individuals recruited in the later part of FY19 and fees generated by the net new recruitment of 108 fee earners during FY20.
Staff Costs
Total staff costs represent 61.4% of revenue compared with 57.2% in 2019.
Fee earner staff costs have increased from 49.6% of turnover to 52.1% of turnover reflecting the investment in fee earners across all levels during the year. As many of our new fee earners joined us during the second half, they have been with Knights for less than the six months it would typically take to achieve the full expected fee earning run rate.
As reported in the second half of FY19 we have continued to invest in our support functions in FY20, focussing on increasing the management resource available within the Group to ensure we have a properly structured support team with sufficient bandwidth to guarantee the continued efficient integration of acquisitions.
In addition to the COO appointed in January 2019, this investment has included the appointment of a projects director, a client services director, an operations director, the expansion of our sales team and further investment in the HR, IT and finance support functions.
During the unprecedented period of working from home due to the nationwide lockdown we have benefitted from previous investments in operational resource and IT as the business was able to continue to operate as normal with no interruption in our ability to transact. We also completed three acquisitions and the related data transfers, onboarding and staff training on Knights' operating systems whilst working remotely, which is testament to the strength of our platform and the dedication of our teams.
These investments, together with the costs of the Executive and Non-Executive Directors as discussed in the Remuneration Committee report, have increased our support staff costs from 7.6% of revenue in FY19 to 9.3% of revenue in the current year.
Management anticipates that these costs will now start to be leveraged by the increased fee generating capacity of the business, supported by the fact that, as at the end of the financial year, the fee earner to support staff ratio was at a level of 4.8 fee earners to every one support staff (on a FTE basis) compared with the average of 4.2 during the year.
Underlying Profit before Tax
During the period we have adopted IFRS 16 in relation to the accounting for lease contracts. As set out in note 37 to the financial statements this resulted in a reduction in profit before tax of £0.5m compared with the level that would have been reported under previous accounting standards. The table below shows the impact of IFRS 16 adoption on the results for the financial year to 30 April 2020 and restates the period to 30 April 2019 for the adoption of IFRS 16 for comparison purposes. All of the commentary below is provided on an IFRS 16 basis in both years, in order to provide a more meaningful comparison.
|
|
IAS 17 |
|
Reported IFRS 16 |
Reported IAS 17 |
|
Comparable under IFRS 16 |
|
|
April 20 |
Change |
April 20 |
April 19 |
Change |
April 19 |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Revenue |
74,254 |
|
74,254 |
52,662 |
|
52,662 |
|
Other operating income |
894 |
|
894 |
415 |
|
415 |
|
Staff costs |
(45,578) |
|
(45,578) |
(30,137) |
|
(30,137) |
|
Depreciation and amortisation charges |
(2,281) |
(1,995) |
(4,276) |
(1,473) |
(1,316) |
(2,789) |
|
Impairment of trade receivables and contract assets |
(112) |
|
(112) |
(439) |
|
(439) |
|
Other operating charges |
(13,770) |
2,266 |
(11,504) |
(11,164) |
1,603 |
(9,561) |
|
Non-underlying costs |
(8,090) |
|
(8,090) |
(1,847) |
|
(1,847) |
|
Operating profit |
5,317 |
271 |
5,588 |
8,017 |
287 |
8,304 |
|
Finance costs |
(677) |
(812) |
(1,489) |
(738) |
(679) |
(1,417) |
|
Non-recurring finance costs |
(41) |
|
(41) |
(2,038) |
|
(2,038) |
|
Profit before tax |
4,599 |
(541) |
4,058 |
5,241 |
(392) |
4,849 |
|
Taxation |
(2,239) |
|
(2,239) |
(1,240) |
|
(1,240) |
|
Profit and total comprehensive income for the year attributable to equity owners of the parent |
2,360 |
(541) |
1,819 |
4,001 |
(392) |
3,609 |
|
|
|
|
|
|
|
|
|
Basic EPS (pence) |
3.16 |
|
2.44 |
5.84 |
|
5.27 |
|
Underlying earnings per share(pence) |
14.30 |
|
14.33 |
11.88 |
|
11.31 |
|
|
|
|
|
|
|
|
|
Underlying Profit Before Tax |
14,157 |
|
13,616 |
9,819 |
|
9,427 |
|
|
|
|
|
|
|
|
|
Underlying Profit After Tax |
11,247 |
|
10,706 |
8,141 |
|
7,749 |
Underlying profit before tax excludes amortisation of acquired intangibles, non-underlying transaction costs relating to the placing in March 2020 and acquisitions made during the year, restructuring costs as a result of acquisitions and the cost saving exercise undertaken in response to the COVID-19 pandemic and contingent consideration payments required to be reflected through the Statement of Comprehensive Income under IFRS. It also excludes share-based payments for one-off share awards made at IPO and as part of the acquisitions, and the one-off Share Incentive Plan offered to employees as a result of the listing. Any share-based payments charges relating to ongoing SAYE and LTIP schemes are recognised as underlying costs of the Group.
Underlying profit before tax has been calculated as an alternative performance measure, in order to provide a more meaningful measure and year on year comparison of the profitability of the underlying business. Underlying profit before tax increased by 45% compared with the same period last year to £13.6m (2019: £9.4m), representing a margin of 18.3% as compared with 17.9% in the prior year.
The improvement in margin is a result of the increase in fee income leveraging general overheads and finance costs in the business which is particularly encouraging given the level of investment in the business. In addition to the investment in fee earning and support staff as discussed above, during the year there has also been investment in other areas of the business in preparation for future organic growth. For example the investment in the increased office premises in Manchester at the start of the financial year has led to an increase in costs of approximately £750k. This investment has allowed organic and acquisitive growth in Manchester during the year with scope for further expansion of up to 70 fee earners in the future, providing opportunity to further leverage overheads and improve profitability over time.
Reported Profit before Tax
The reported profit before tax for the year has decreased by 16.3% to £4.1m (2019: £4.8m on a comparable IFRS 16 basis). The decrease in reported profit before tax of £0.7m in the year reflects the net impact of increased revenue, the leveraging of overheads of £3.5m, the decrease in non-recurring finance costs of £2m and the increased non-underlying costs of £6.2m. The significant increase in the non-underlying costs incurred due to the six acquisitions (FY19: four) and restructuring exercise undertaken as a result of the COVID-19 pandemic. The non-underlying costs relating to acquisitions include the recognition of some contingent payments on acquisitions and the restructuring costs.
Earnings per Share (EPS)
The weighted average number of shares in 2020 was 74,675,462 (2019: 68,533,094) which gives a basic earnings per share (Basic EPS) for the year of 2.44p (2019: 5.27p). Taking into account the number of share options that the Group has outstanding at the year end gives a diluted EPS of 2.41p (2019: 5.24p).
In order to compare the EPS year on year, the underlying EPS has been calculated showing 14.33p in 2020 compared with 11.31p in the prior year. This measure eliminates the effect of any non-recurring and non-underlying costs on the EPS calculation.
Corporation Tax
The Group's tax charge for the year was £2.2m (2019: £1.2m) which was made up of a current corporation tax charge of £1.9m and a deferred tax charge of £0.3m (2019: credit of £0.1m).
The deferred tax charge arises due to the charge on the acquired intangible assets and the increase in the expected future corporation tax rate from 17% to 19%.
The total effective rate of tax is 55% based on reported profits before tax. This has been adversely affected by non-underlying items (largely amortisation of acquired intangible assets and the recognition of contingent consideration on acquisitions against profits) that are not tax deductible. The effective rate of tax on the underlying profits of the business is 21% (see note 16 of the financial statements).
Dividend
Due to the COVID-19 pandemic and the resultant uncertainty of the effects on the UK economy the Board has introduced cost cutting measures across the Group to ensure that the business is in the best possible position given the current uncertainty. Whilst these cost cutting measures are in place, the Board has decided that it would not be appropriate to propose a final dividend for the financial year at this time. As such the total dividend for the year ended 30 April 2020 will be the amount already paid as an interim dividend, being 1.10p per share (2019: 1.87p per share).
Balance Sheet
The Group adopted IFRS 16 Leases during the period. The table below shows the impact of IFRS 16 adoption on the Balance Sheet as at 30 April 2020 and shows the comparatives as at 30 April 2019 after adoption of IFRS 16 for comparison purposes. As explained in note 3 to the financial statements, the Group adopted the transition method for implementing IFRS16 which does not require the restatement of comparative figures.
|
|
|
|
IAS 17 April 20 |
Change |
Reported IFRS 16 April 20 |
Reported IAS 17 April 19 |
Change |
Comparable under IFRS 16 April 19 |
|
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Intangible assets |
69,135 |
- |
69,135 |
46,444 |
- |
46,444 |
||
|
Right of use assets |
|
- |
23,749 |
23,749 |
- |
19,470 |
19,470 |
|
|
Working capital |
|
27,681 |
- |
27,681 |
11,762 |
- |
11,762 |
|
|
Other net assets (liabilities) |
(2,012) |
|
(2,012) |
(1,616) |
|
(1,616) |
||
|
Lease liabilities |
|
- |
(23,844) |
(23,844) |
- |
(19,018) |
(19,018) |
|
|
|
|
|
94,804 |
(95) |
94,709 |
56,590 |
452 |
57,042 |
|
Cash and cash equivalents |
12,741 |
- |
12,741 |
4,904 |
- |
4,904 |
||
|
Borrowings |
|
(28,650) |
- |
(28,650) |
(19,000) |
- |
(19,000) |
|
|
Net debt |
|
|
(15,909) |
- |
(15,909) |
(14,096) |
- |
(14,096) |
|
Deferred consideration |
(2,850) |
- |
(2,850) |
(3,239) |
- |
(3,239) |
||
|
Net assets |
|
|
76,045 |
(95) |
75,950 |
39,255 |
452 |
39,707 |
The Group's net assets as at 30 April 2020 increased by £36.2m reflecting the shares issued in relation to acquisitions in the year, the placing in March 2020, and profit, net of dividends paid during the year. The working capital as at the end of the year shows a disproportionate increase when compared with the increase in turnover due to the three large acquisitions at the year end, with the full impact of the acquired working capital but only two months of income included in turnover for the year.
Goodwill and Intangible assets
Included within intangible assets and goodwill is £29.4m of intangible assets, identified on current and prior acquisitions, such as customer relationships, brand and computer software. The balance relates to goodwill of £39.7m arising from acquisitions.
The Board carries out an impairment review of goodwill each year to ensure the carrying value is supportable. Although the Board cannot predict with any certainty the level of future trading of the business given the current economic uncertainty, the value in use of the goodwill was calculated using a number of different scenarios, some of which assumed a considerably worse outcome than is anticipated by the directors. In all instances, the value in use of the business was more than sufficient to justify the carrying value of goodwill. Therefore, as at 30 April 2020, the Board concluded that the goodwill and intangible assets are not impaired.
Working Capital
Lock up days is the primary metric used by the Group to measure the length of time it takes to convert work recorded into cash received. It is calculated as the combined debtor and WIP days for the Group. Management of lock up has continued to be a key focus of the Group over the period as it drives the cash generation necessary to support the growth strategy of the Group. Total lock up days at 30 April 2020, were 105 compared with 93 the previous year.
Management are satisfied with the level of lock up at the year end which remains significantly better than the industry average despite being adversely affected by the acquisitions during the year that had longer lock up profiles when acquired. Excluding the impact of extended lock up on acquisitions during the year, the lock up at 30 April 2020 was 85 days (2019: 88 days).
Average lock up days of acquisitions was 137 days pre-acquisition which has reduced to 130 days at the year end. Due to the proximity of a number of the larger acquisitions to the year end, lock up has not reduced significantly in acquisitions as at 30 April 2020. However, we anticipate lock up of recent acquisitions to reduce to levels in line with the rest of the Group during the first half of FY21.
The Group's strong control over debtors is reflected in a low level of bad debts. The total bad debt charge for the year has reduced to just 0.2% of turnover (2019: 0.8%).
Net Debt, Financing and Leverage
The strong cash conversion in the period, together with the funds raised during the Placing in March 2020 have resulted in net debt of £15.9m at the year end which was over £1m better than expectations. This figure represents an increase in net debt from the £14.1m as at April 2019 due to an aggregate cash outlay of £3m relating to consideration for acquisitions made during the period and deferred consideration paid in relation to acquisitions in prior years, net of the £20m proceeds from the placing.
During the year, the Group increased its RCF facility to £40m (split between two banking partners: AIB and HSBC). This increased facility, together with the additional net £19.2m funds raised through a placing of shares on 6 March 2020, gives the Group good headroom and positions the Group well to both deal with the economic uncertainty created by the ongoing COVID-19 pandemic and continue its growth strategy into 2021 through continued organic recruitment and carefully selected, culturally aligned acquisitions.
|
Cash Conversion
|
|
|
|
|
|
|
|
|
2020 £'000 |
2019 £'000 |
|
Net cash generated from underlying operating activities |
13,791 |
11,706 |
|
Tax paid |
(2,907) |
(1,076) |
|
Cash outflow for IFRS 16 leases (rental payments excluded from operating cash flows under IFRS 16) |
(2,366) |
- |
|
Free cash flow |
8,158 |
10,630 |
|
Underlying profit after tax |
10,706 |
7,749 |
|
Cash conversion |
80% |
137% |
The cash conversion percentage measures the Group's conversion of its underlying profit after tax into free cash flows. Cash conversion of 137% in 2019 was an exceptional result reflecting the cash flow benefit of reducing the lock up in acquired businesses to a level in line with the rest of the Group. Cash conversion of 80% in the year to 30 April 2020 reflected the extended lock up in recent acquisitions.
Capital Expenditure
During the year the Group has continued to invest in its systems and premises to expand our capacity and ensure our professionals continue to benefit from a high quality working environment, with consistent systems across the Group aiding integration and supporting our one firm culture.
The total £2.2m invested in capital expenditure (excluding right of use assets capitalised as part of the adoption of IFRS16) included the following one-off non-recurring significant items required as a result of the acquisitions and continued growth of the Group:
|
|
|
|
£m |
|
|
|
|
|
|
Refurbishment of new Manchester premises |
0.5 |
||
|
Refurbishment of Oxford premises (to expand capacity) |
0.3 |
||
|
Refurbishment of additional office space in Wilmslow |
0.3 |
||
|
Provision of new / upgraded IT equipment for acquisitions |
0.5 |
||
|
|
|
|
|
|
|
|
|
1.6 |
|
|
|
|
|
Other capital spend in the financial year relates to general investment in IT, communications and infrastructure required for the increase in the number of employees, and to support our programme of rolling IT replacements to ensure our technology is up to date and sufficient to meet the needs of the business.
Due to the current economic uncertainty the Directors wish to monitor the impact on the business closely before committing to significant expenditure. As such, the capital budgets for FY21 have not yet been finalised. Nonetheless, the Group remains committed to ensuring all acquisitions are fully integrated onto Knights' operating system with a comparable high quality working environment.
Following entry into new markets through acquisition, we expect some expenditure on new premises in Nottingham and Birmingham where leases are due to expire on existing premises in the next financial year. We have also committed to new modern offices in a central Leeds location and we are reviewing the need for investment in Maidstone and Crawley offices before finalising budgets for the year.
Acquisitions
During the year we completed six acquisitions. The table below summarises the net impact of the acquisitions during the year and in FY19 on cash during the current year and in future years. This shows the impact of consideration payable net of any cash in the acquired businesses.
|
|
|
|
The above includes estimated contingent consideration charged as remuneration in the Income Statement.
Acquisitions completed during the year were structured with a lower initial cash outlay, altering the balance between cash, shares and deferred or contingent consideration agreed, as confidence in the value of the Group's shares has increased.
The strong cash and lock up management systems in the Group mean that often we generate cash from the balance sheets of acquired businesses.
Tax - Cash flow impact
Corporation tax
In FY20, the Group and Company fell under the large Quarterly Payments regime for corporation tax for the first time. This had the effect of advancing the corporation tax payments such that the full estimated corporation tax for the financial year has been paid during the year rather than only 50% under the prior year's tax regime. The cash impact of these additional tax payments during the year was approximately £1.1m.
VAT
During the COVID-19 pandemic the Group benefitted from the temporary ability to defer VAT payments until June. As at 30 April 2020 this had had a positive impact on cash of approximately £0.8m. This deferral of VAT will reverse, impacting cash flow in FY21.
Key Performance Indicators
The Group uses a number of key performance indicators (KPIs) to monitor the Group's performance against its strategic objectives. These comprise a number of financial and non-financial measures which are agreed and monitored regularly at Board meetings. The financial indicators are calculated based on underlying results excluding any one-off transactional and acquisition related costs. The Board is of the opinion that these operational factors are key drivers for the Group's financial success.
Number of Fee Earners / Fees per Fee Earner
Top line growth is a product of the number of fee earners employed and the fees per fee earner that they are generating, therefore these are two KPIs that the Board monitors closely on a monthly basis.
The number of full time equivalent fee earners in the Group more than doubled to 865 at the end of the financial year from 426 at the start of the year, which reflected a combination of new recruits and new joiners via acquisition partially offset by the restructuring exercise undertaken as a result of the COVID-19 pandemic.
Overall fees per fee earner of £119k were generated during the year compared with £131k in 2019.
As a business that has always been focussed on cash and profits rather than fees, fees per fee earner, although a useful benchmark, needs to be considered alongside other profit based KPIs as the fees per fee earner can vary from period to period based on a range of factors. For instance, in the reporting year:
· As anticipated, the Group's strong recruitment in the financial year reduced the reported fees per fee earner. In the first year of recruitment, due to the necessary training and onboarding processes that take place for all new recruits, it typically takes three to six months for new recruits to achieve their expected run-rate on fee generation.
· During the year the Group continued to invest in paralegal and trainee resource to support the more experienced recruits joining the business and to ensure teams had sufficient resource at all levels. As Knights includes paralegals and trainees as fee earners, this change in mix brings down the average fee per fee earner.
· Acquisitions typically bring a lower fee per fee earner prior to full onboarding.
New recruits during the year generated £71k per recruit and acquisitions during the year generated £119k per fee earner, many of which have only been with the business for less than six months.
From our first acquisition in 2012, management has always been more focussed on growth in profitability and in the cash generation of the business rather than the fee income per fee earner; therefore a more important KPI and area for focus by the Board is the underlying profitability of the Group and by fee earner. The key drivers impacting underlying profit before tax for the year are discussed below.
Underlying Profit Before Tax (PBT)
With the adoption of IFRS 16 during the year, the Board views the KPI of underlying PBT as a more accurate measure of its performance as this reflects all of the property and lease costs incurred by the Group. The Board believes that it is an important metric for monitoring the profitability of ongoing operations.
Underlying PBT excludes amortisation of goodwill on acquired intangible assets and one-off transaction costs relating to the placing of shares in March 2020, acquisitions made during the year and restructuring costs as a result of acquisitions and the cost saving exercise undertaken in response to the COVID-19 pandemic. It also excludes share-based payments for one-off share awards along with contingent consideration payments required to be reflected through the Statement of Comprehensive Income as remuneration under IFRS accounting conventions.
The underlying PBT for 2020 has grown by 45% over the 2019 comparative level. This represents a PBT margin of 18.3% compared with 17.9% in 2019 reflecting the fact that the increased scale of the business is further leveraging the overheads of the business whilst also allowing the Group to invest in new fee earners, support staff and larger premises to provide a stable base for future growth.
As a result, underlying PBT per fee earner remained relatively stable at £22,000 per fee earner compared with £23,000 in 2019, despite the additional investment and recruitment in the year.
Fee Earner to Non Fee Earner Ratio
The business model and use of IT systems have been key in enabling the Group to maintain a fee earner to non fee earner staff ratio that is much higher than the average for the sector. This continues to be one of the key differentiators in our business model enabling the Group to generate such strong margins.
As at 30 April 2020, due to the growth in the business via acquisitions and organic recruitment the Group is operating at a ratio of 4.8 fee earners for every one support staff. This is despite the investment in support staff during the year and now places the Group in an excellent position to continue to leverage overhead costs in the coming year. However, the Board recognises the importance of ensuring that the support function is always sufficient for the business and that capacity is in place before any significant planned growth. Therefore, the Group will accordingly continue to invest in support staff to create the required sustainable base for future growth meaning that this ratio may vary over time dependant on where the Group is in its investment and growth cycle.
In Summary
The Board is pleased with the growth in fee income and profitability during the year which has been achieved whilst also investing significantly in the strengthening of the management and support staff function as well as organic income growth via recruitment. The ability of the Group to deliver such strong results is particularly pleasing given the significant impact of COVID-19 in the last month of the financial year.
The Group's performance, together with the lower than anticipated levels of net debt due to the Group's excellent cash management, places us in a strong position to continue to grow the business both organically through recruitment, and through selective acquisition opportunities.
Kate Lewis
Chief Financial Officer
21 July 2020
Financial Statements
Consolidated Statement of Comprehensive Income
For the year ended 30 April 2020
|
|
Note |
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Revenue |
5 |
74,254 |
52,662 |
|
Other operating income |
7 |
894 |
415 |
|
Staff costs |
8 |
(45,578) |
(30,137) |
|
Depreciation and amortisation charges |
11 |
(4,276) |
(1,473) |
|
Impairment of trade receivables and contract assets |
|
(112) |
(439) |
|
Other operating charges |
12 |
(11,504) |
(11,164) |
|
Operating profit before non underlying charges |
|
13,678 |
9,864 |
|
Non-underlying operating costs |
13 |
(8,090) |
(1,847) |
|
Operating profit |
|
5,588 |
8,017 |
|
Finance costs |
14 |
(1,530) |
(2,776) |
|
Profit before tax |
|
4,058 |
5,241 |
|
Taxation |
16 |
(2,238) |
(1,240) |
|
Profit and total comprehensive income for the year attributable to equity owners of the parent |
|
1,820 |
4,001 |
|
|
|
Pence |
Pence |
|
Basic earnings per share |
17 |
2.44 |
5.84 |
|
Diluted earnings per share |
17 |
2.41 |
5.81 |
Consolidated Statement of Financial Position
As at 30 April 2020
|
|
Note |
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Assets |
|
|
|
|
Non-current assets |
|
|
|
|
Intangible assets and goodwill |
19 |
69,135 |
46,444 |
|
Property, plant and equipment |
21 |
5,562 |
3,319 |
|
Right-of-use assets |
21 |
23,749 |
- |
|
|
|
98,446 |
49,763 |
|
Current assets |
|
|
|
|
|
|
|
|
|
Contract assets |
22 |
21,507 |
11,112 |
|
Trade and other receivables |
23 |
27,046 |
13,671 |
|
Cash and cash equivalents |
|
12,741 |
4,904 |
|
|
|
61,294 |
29,687 |
|
Total assets |
|
159,740 |
79,450 |
|
|
|
|
|
|
Equity and liabilities |
|
|
|
|
Equity |
|
|
|
|
Share capital |
24 |
164 |
147 |
|
Share premium |
25 |
66,252 |
32,486 |
|
Merger reserve |
26 |
(3,536) |
(3,536) |
|
Retained earnings |
26 |
13,070 |
10,158 |
|
Equity attributable to owners of the parent |
|
75,950 |
39,255 |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Lease liabilities |
37 |
21,078 |
- |
|
Borrowings |
27 |
28,650 |
19,000 |
|
Deferred consideration |
28 |
127 |
1,611 |
|
Deferred tax |
29 |
5,429 |
3,488 |
|
|
|
55,284 |
24,099 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Lease liabilities |
37 |
2,766 |
- |
|
Trade and other payables |
30 |
20,019 |
12,105 |
|
Deferred consideration |
28 |
2,723 |
1,628 |
|
Contract liabilities |
22 |
177 |
120 |
|
Corporation tax liability |
|
675 |
796 |
|
Provisions |
31 |
2,146 |
1,447 |
|
|
|
28,506 |
16,096 |
|
Total liabilities |
|
83,790 |
40,195 |
|
Total equity and liabilities |
|
159,740 |
79,450 |
Consolidated Statement of Changes in Equity
For the year ended 30 April 2020
|
|
|
|
|
||||
|
|
Note |
Share capital |
Share premium |
Merger reserve £'000 |
Retained earnings |
Total |
|
|
|
|
|
|
|
|
|
|
|
At 1 May 2018 |
|
100 |
- |
(3,536) |
6,234 |
2,798 |
|
|
Profit for the period and total comprehensive income |
|
- |
- |
- |
4,001 |
4,001 |
|
|
Transactions with owners in their capacity as owners: |
|
|
|
|
|
|
|
|
Credit to equity for equity-settled share-based payments |
9 |
- |
- |
- |
356 |
356 |
|
|
Issue of shares |
24,25 |
47 |
32,486 |
- |
- |
32,533 |
|
|
Dividends |
18 |
- |
- |
- |
(433) |
(433) |
|
|
Balance at 30 April 2019 |
|
147 |
32,486 |
(3,536) |
10,158 |
39,255 |
|
|
IFRS 16 impact |
37 |
- |
- |
- |
2,058 |
2,058 |
|
|
As at 1 May 2019 - restated |
|
147 |
32,486 |
(3,536) |
12,216 |
41,313 |
|
|
Profit for the period and total comprehensive income |
|
- |
- |
- |
1,820 |
1,820 |
|
|
Transactions with owners in their capacity as owners: |
|
|
|
|
|
|
|
|
Credit to equity for equity-settled share-based payments |
9 |
- |
- |
- |
789 |
789 |
|
|
Issue of shares |
24,25 |
17 |
33,766 |
- |
- |
33,783 |
|
|
Dividends |
18 |
- |
- |
- |
(1,755) |
(1,755) |
|
|
Balance at 30 April 2020 |
|
164 |
66,252 |
(3,536) |
13,070 |
75,950 |
|
Consolidated Statement of Cash Flows
For the year ended 30 April 2020
|
|
Note |
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Operating activities |
|
|
|
|
Cash generated from operations |
34 |
13,791 |
11,706 |
|
Non-underlying operating costs paid |
|
(3,398) |
(1,443) |
|
Interest received |
|
328 |
142 |
|
Tax paid |
|
(2,907) |
(1,076) |
|
Net cash from operating activities |
|
7,814 |
9,329 |
|
|
|
|
|
|
Investing activities |
|
|
|
|
Acquisition of subsidiaries |
20 |
(11,907) |
(11,760) |
|
Purchase of intangible fixed assets |
19 |
(26) |
(90) |
|
Purchase of property, plant and equipment |
21 |
(2,501) |
(1,214) |
|
Proceeds from sale of property, plant and equipment |
|
21 |
1 |
|
Payment of deferred and contingent consideration |
|
(3,966) |
(1,095) |
|
Net cash used in investing activities |
|
(18,379) |
(14,158) |
|
|
|
|
|
|
Financing activities |
|
|
|
|
Proceeds from issue of share capital |
|
20,543 |
28,582 |
|
Proceeds of new borrowings |
|
44,800 |
14,750 |
|
Repayment of borrowings |
|
(35,150) |
(24,940) |
|
Repayment of debt acquired with subsidiaries |
20 |
(7,049) |
(8,308) |
|
Repayment of lease liabilities |
|
(1,576) |
- |
|
Interest and other finance costs paid |
|
(1,411) |
(2,036) |
|
Dividends paid |
|
(1,755) |
(433) |
|
Net cash generated from financing activities |
|
18,402 |
7,615 |
|
Net increase in cash and cash equivalents |
|
7,837 |
2,786 |
|
Cash and cash equivalents at the beginning of the period |
|
4,904 |
2,118 |
|
Cash and cash equivalents at end of period |
|
12,741 |
4,904 |
2019 cash flow restated to show £3,865,000 of cash acquired from subsidiaries as part of investing activities instead of financing activities.
Notes to the Consolidated Financial Statements
For the year ended 30 April 2020
1. General Information
Knights Group Holdings plc ("the Company") is a public company limited by shares and is registered, domiciled and incorporated in England.
The Company was incorporated in England as Knights Group Holdings Limited on 4 April 2018 as a private company limited by shares (registered no. 11290101) and subsequently acquired Knights 1759 Limited (the previous parent company in the group) and its subsidiaries on 18 June 2018 through a share for share exchange. The Company was re-registered as a public limited company on 20 June 2018 and became Knights Group Holdings plc.
The Group consists of Knights Group Holdings plc and all of its subsidiaries.
The principal activity and nature of operations of the Group is the provision of legal and professional services. The address of its registered office is:
The Brampton
Newcastle-under-Lyme
Staffordshire
ST5 0QW
2. Accounting policies
2.1 Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards adopted by the European Union (IFRSs).
Applying IFRSs requires the directors to exercise judgement and use certain critical accounting estimates, the judgments and estimates that the directors deem significant in the preparation of these financial statements are explained in note 4.
The financial statements have been prepared on the historical cost basis unless IFRSs requires an alternative treatment. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Monetary amounts are presented in sterling, being the functional currency of the Group, rounded to the nearest thousand except where otherwise indicated.
The principal accounting policies adopted are set out below. These policies have been consistently applied to all periods presented in the financial statements, unless otherwise stated.
2.2 Going concern
The accounts are prepared on a going concern basis as, at the time of approving the financial statements, the directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future. The Group has a strong trading performance, is cash generative and has banking facilities of £40,000,000 available until June 2023. The Group's forecasts show sufficient cash generation, and headroom in banking facilities and covenants, in relation to anticipated future requirements to support the directors' conclusion that the assumption of the going concern basis of accounting in preparing the financial statements is appropriate.
In the period since the pandemic arose and the UK entered lockdown at the end of March 2020, the Group has continued to trade profitably and cash generation has remained strong, but during the initial stages of lockdown there was a meaningful decline in the number of new instructions arising. This decline has levelled out and there are early indications of new instructions beginning to increase. However given the unprecedented nature of the situation and the wider impact on the economic environment it is impossible to forecast the future impact on trading of the Group and Company with any certainty. Therefore in order to satisfy the validity of the going concern assumption, a number of different trading scenarios have been modelled and reviewed. Some of these scenarios forecast a significantly more negative trading performance than is expected. In all of these scenarios the Group remained profitable and with significant headroom in its cash resources for the 12 months from the date of approval of the accounts.
2.3 Basis of consolidation
The consolidated financial statements incorporate the results of Knights Group Holdings plc and all of its subsidiaries. Subsidiaries results are consolidated in the financial statements from the earlier date that economic benefit is obtained or control commences until the date that control ceases.
On 18 June 2018, the whole of the share capital of Knights 1759 Limited was acquired by the Company via a share for share exchange agreement. The acquisition is outside the scope of IFRS 3 because Knights Group Holdings Limited did not meet the definition of a business. In the absence of specific guidance in IFRS, the group has selected an appropriate accounting policy using the hierarchy described in paragraphs 10 to 12 of IAS 8, which permits the consideration of other Financial Reporting Standards. The Group has adopted the principles of merger accounting from FRS 102. Accordingly, the consolidated financial statements for the Group have been presented as if Knights 1759 Limited had been owned by Knights Group Holdings plc throughout the preceding periods.
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the earlier date control commences until the date that control ceases.
Transactions eliminated on consolidation
All intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Where necessary, adjustments are made to the financial information of subsidiaries to bring the accounting policies used into line with those used by the Group.
Audit exemption of subsidiaries
The following subsidiaries are exempt from the requirements of the UK Companies Act 2006 relating to the audit of individual accounts by virtue of s479A of the Act.
|
Name |
Registered number |
|
Turner Parkinson LLP |
OC312799 |
|
Spearing Waite LLP |
OC361998 |
|
Cummins Solicitors Limited |
07403259 |
|
BrookStreet Des Roches LLP |
OC317863 |
|
Dakeyne Emms Gilmore Liberson Limited |
06850969 |
|
ERT Law Limited |
09182964 |
|
Croftons Solicitors LLP |
OC343375 |
|
Fraser Brown Solicitors |
N/a |
|
Shulmans LLP |
OC348166 |
|
ASB Law LLP |
OC351354 |
|
ASB Aspire LLP |
OC327667 |
The outstanding liabilities at 30 April 2020 of the above named subsidiaries have been guaranteed by the Company pursuant to s479A to s479C of the Act. In the opinion of the directors, the possibility of the guarantee being called upon is remote since the trade, assets and majority of liabilities of these subsidiaries were transferred to Knights Professional Services Limited before 30 April 2020.
2.4 Business combinations
The cost of a business combination is the fair value at the acquisition date, of the assets given, equity instruments issued and liabilities incurred or assumed.
The excess of the cost of a business combination over the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recognised as goodwill.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.
2.5 Revenue
The Group earns revenue from the provision of legal and professional services. Revenue for these services is recognised over time in the accounting period when services are rendered.
Fee arrangements for legal and professional services include fixed fee arrangements, unconditional fee-for-service arrangements ("time and materials"), and variable or contingent fee arrangements.
For fixed fee arrangements, revenue is recognised based on the stage of completion with reference to the actual services provided as a proportion of the total services expected to be provided under the contract. The stage of completion is tracked on a contract-by-contract basis using the hours spent by fee-earners providing the services.
In fee-for-service contracts, revenue is recognised up to the amount of fees that the Group is entitled to bill for services performed to date based on contracted rates.
Under variable or contingent fee arrangements, fees may be earned only in the event of a successful outcome of a client's claim. Fees under these arrangements may be fixed or may be variable based on a specified percentage of damages awarded under a claim.
For variable or contingent fee arrangements management makes a detailed assessment of the amount of revenue expected to be received and the probability of success of each case. Variable consideration is recognised only to the extent that it is highly probable that the amount recognised will not be subject to significant reversal when the matter is concluded. In such circumstances, a level of judgement is required to determine the likelihood of success of a given matter, as well as the estimated amount of fees that will be recovered in respect of the matter. Where the likelihood of success of a contingent fee arrangement is less than highly probable, the value recognised in contract assets is further reduced to reflect this uncertainty.
Certain contingent fee arrangements are undertaken on a partially funded basis. In such arrangements, the funded portion of fees is not contingent on the successful outcome of the litigation and in these instances the revenue is recognised up to the amount of fees that the Group is entitled to bill for services performed to date based on contracted rates. The remaining consideration is variable and conditional on the successful resolution of the litigation. The variable consideration is included in revenue only to the extent that it is highly probable that the amount recognised will not be subject to significant reversal when the uncertainty is resolved.
The Group's contracts with clients each comprise of a single distinct performance obligation, being the provision of legal and professional services in relation to a particular matter and the transaction price is therefore allocated to this single performance obligation.
Estimates of revenues, costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in the Statement of Comprehensive Income in the period in which the circumstances that give rise to the revision become known by management.
The Group has determined that no significant financing component exists in respect of the provision of legal and professional services because the period between when the entity transfers its services to a client and when the client pays for that service will generally be one year or less.
Consideration for services provided under contingent or variable fee arrangements may be paid after a longer period. In these cases, no significant financing component exists because the consideration promised by the customer is variable subject to the occurrence or non-occurrence of a future event that is not substantially within the control of the client or the Group.
A receivable is recognised when a bill has been issued to the client, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.
Unbilled revenue is recognised as contract assets. Costs incurred in fulfilling the future performance obligations of a contract are recognised as contract assets if the costs are expected to be recovered.
Contract liabilities are recognised in respect of consideration billed in advance of satisfying the performance obligation under the contract.
2.6 Taxation
The tax expense represents the sum of the current tax expense and the deferred tax expense. Current tax assets are recognised when the tax paid exceeds the tax payable. Current tax is based on taxable profit for the year. Current tax assets and liabilities are measured using tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled based on tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax liabilities are recognised in respect of all timing differences that exist at the reporting date. Timing differences are differences between taxable profits and total comprehensive income that arise from the inclusion of income and expenses in tax assessments in different periods from their recognition in the financial statements. Deferred tax assets are recognised only to the extent that it is probable that they will be recovered by the reversal of deferred tax liabilities or other future taxable profits.
Deferred tax is recognised on differences between the value of assets (other than goodwill) and liabilities recognised in a business combination and the amounts that can be deducted or assessed for tax. The deferred tax recognised is adjusted against goodwill.
Current tax assets and current tax liabilities and deferred tax assets and deferred tax liabilities are offset, if and only if, there is a legally enforceable right to set off the amounts and the entity intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
2.7 Intangible assets - Goodwill
Goodwill arising on the acquisition of an entity represents the excess of the cost of acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less accumulated impairment losses. Goodwill is tested annually by the directors for evidence of impairment.
2.8 Intangible assets - Other than goodwill
Intangible assets purchased, other than in a business combination, are recognised when future economic benefits are probable and the cost or value of the asset can be measured reliably.
Intangible assets arising on a business combination, such as customer relationships, are recognised at estimated fair value, except where the asset does not arise from legal or contractual rights, and there is no history or evidence of exchange transactions for the same or similar assets and estimating the assets fair value would depend on immeasurable variables. The fair value represents the directors best estimate of future economic benefit to be derived from these assets discounted at an appropriate rate.
Intangible assets are initially recognised at cost (which for intangible assets acquired in a business combination is the fair value at acquisition date) and are subsequently measured at cost less accumulated amortisation and accumulated impairment losses.
Intangible assets are amortised to the Statement of Comprehensive Income on a straight-line basis over their estimated useful lives, as follows:
|
Purchased computer software |
- |
4 years |
|
Customer relationships |
- |
5-25 years |
|
Brand |
- |
100 years |
Purchased computer software is amortised over a period of 4 years, being the minimum period expected to benefit from the asset.
Customer relationships are amortised over a period of 5-25 years being the average length of relationship with key clients for acquired entities.
Brand value is amortised over a period of 100 years based on the directors' assessment of the future life of the brand. This is supported by a trading history dating back to 1759. Brand value relates to the 'Knights' brand only. Other acquired brands are not recognised as an asset as the acquired entities are rebranded as Knights and the impact of such recognition would not be material.
2.9 Property, plant and equipment
Property, plant and equipment are stated at cost net of depreciation and any provision for impairment.
Depreciation is provided on property, plant and equipment at rates calculated to write each asset down to its estimated residual value over its expected useful life, as follows:
|
Expenditure on short leasehold property |
- |
10% on cost |
|
Office equipment |
- |
25% on cost |
|
Furniture and fittings |
- |
10% on cost |
|
Motor vehicles |
- |
25% on cost |
|
Right-of-use assets |
- |
useful life of the lease (between 1 and 21 years) |
Residual value is calculated on prices prevailing at the reporting date, after estimated costs of disposal, for the asset as if it were at the age and in the condition expected at the end of its useful life.
2.10 Impairment of non-current assets
An assessment is made at each reporting date of whether there are indications that non-current assets may be impaired or that an impairment loss previously recognised has fully or partially reversed. If such indications exist, the Group estimates the recoverable amount of the asset or, for goodwill, the recoverable amount of the cash-generating unit.
Shortfalls between the carrying value of non-current assets and their recoverable amounts, being the higher of fair value less costs to sell and value-in-use, are recognised as impairment losses. All other impairment losses are recognised in the Statement of Comprehensive Income.
Recognised impairment losses are reversed if, and only if, the reasons for the impairment loss have ceased to apply. Reversals of impairment losses are recognised in the Statement of Comprehensive Income. On reversal of an impairment loss, the depreciation or amortisation is adjusted to allocate the asset's revised carrying amount (less any residual value) over its remaining useful life.
2.11 Provisions
In common with comparable practices, the Group is involved in a number of disputes in the ordinary course of business which may give rise to claims. Provision is made in the financial statements, within provisions for all claims where costs are likely to be incurred. This represents the cost of defending and concluding claims and any excesses that may become payable. The Group carries professional indemnity insurance and no separate disclosure is made of the cost of claims covered by insurance as to do so could seriously prejudice the position of the Group.
2.12 Leases
The Group leases offices, equipment and vehicles. Rental contracts are for periods of between 3 and 25 years. Lease terms are negotiated on a lease by lease basis and contain a variety of terms and conditions.
The Group assesses whether a contract is or contains a lease at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (being those assets with a value less than £4,000). For short term and low value leases, the Group recognises the lease payments as an operating expense on a straight line basis over the term of the lease.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
• fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• variable lease payments that are based on an index or a rate;
• amounts expected to be payable by the Group under residual value guarantees;
• the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
• payments of penalties for terminating the lease, if the lease term assumed reflects the group exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the group's incremental borrowing rate is used, being the rate that the group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.
The lease liability is presented as a separate line in the Consolidated Statement of Financial Position.
Right-of-use assets are recognised at commencement of the lease and initially measured at the amount of the lease liability, plus any incremental costs of obtaining the lease and any lease payments made at or before the leased asset is available for use by the Group.
Subsequent to initial recognition, the lease liability is reduced for payments made and increased to reflect interest on the lease liability (using the effective interest method). The related right-of-use asset is depreciated over the term of the lease or, if shorter, the useful economic life of the leased asset. The lease term shall include the period of an extension option where it is reasonably certain that the option will be exercised. Interest on the lease liability is recognised in the Statement of Comprehensive Income.
An estimate of the costs to be incurred in restoring the leased asset to the condition required under the terms and conditions of the lease is recognised as part of the cost of the right-of-use asset when the group incurs the obligation for these costs. The costs are incurred at the start of the lease or over the lease term. The provision is measured at the best estimate of the expenditure required to settle the obligation.
The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use
asset) whenever:
• the lease term has changed or there is a significant change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate;
• The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used);
• a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.
The Group did not make any such adjustments during the periods presented.
2.13 Retirement benefits
2.13a Defined contribution scheme
The Group operates a defined contribution scheme. The amount charged to the Statement of Comprehensive Income in respect of pension costs is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accrued expenses or prepayments and other receivables.
2.13b Defined benefit pension scheme
For defined benefit schemes the amounts charged to operating profit are the current service costs and gains and losses on settlements and curtailments. They are included as part of staff costs. Past service costs are recognised immediately in the Statement of Comprehensive Income if the benefits have vested. If the benefits have not vested immediately, the costs are recognised over the period until vesting occurs. The interest cost and the expected return on assets are shown as a net amount of other finance costs or credits adjacent to interest. Actuarial gains and losses are recognised immediately in the Statement of Comprehensive Income.
Defined benefit schemes are funded, with the assets of the scheme held separately from those of the Group, in separate trustee administered funds. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme liabilities. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date.
Defined benefit assets are not recognised in the Statement of Financial Position, on the basis that future economic benefits are not available to the Group in the form of a reduction in future contributions or a cash refund.
For the 'With Profit Section' contributions are recognised in Statement of Comprehensive Income in the period to which they relate as there is insufficient information available to use defined benefit accounting. A liability will be recognised based on the agreed share of the Group in the scheme. No liability has been recognised as at 30 April 2020 as it is not deemed material and is as a result of a temporary timing difference.
2.14 Share Based Payments
The cost of providing share based payments to employees is charged to the Statement of Comprehensive Income over the vesting period of the awards. The cost is based on the fair value of awards at the date of grant of the award using an appropriate valuation model. The amount recognised as an expense will be adjusted to reflect differences between the expected and actual vesting levels. Further details of the schemes are included in note 9.
2.15 Financial instruments
Financial instruments are recognised on the date when the Group becomes a party to the contractual provisions of the instrument. Financial instruments are recognised initially at fair value. Financial instruments are derecognised when the Group is no longer party to the contractual provisions of the instrument.
Financial assets
Contract assets and trade receivables
Contract assets and trade receivables which are receivable within one year are initially measured at fair value. These assets are subsequently measured at amortised cost, being the transaction price less any amounts settled and any impairment losses.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses ('ECL') on contract assets and trade receivables. The expected credit losses on trade receivables includes specific provisions against known receivables and an estimate using a provision matrix by reference to past experience and an analysis of the debtor's current financial position on the remaining balance. The expected credit losses on contract assets and other receivables is assessed based on historical credit loss experienced on these types of assets adjusted for known foreseeable estimated losses.
Financial liabilities and equity
Financial instruments are classified as liabilities and equity instruments according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Trade and other payables
Trade and other payables due within one year are initially measured at fair value and subsequently measured at amortised cost, being the transaction price less any amounts settled.
Deferred consideration
Deferred consideration is initially recognised at the fair value of the amounts payable and subsequently at amortised cost of the agreed payments in accordance with the agreement. Any interest payable on the balance is reflected in the value of the liability and charged monthly to the Statement of Comprehensive Income as it arises.
Borrowings
Borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowings. Borrowings are subsequently measured at amortised cost using the effective interest method. Interest expense is recognised on the basis of the effective interest method and is included in interest payable and other similar charges.
Derecognition of financial assets and liabilities
A financial asset is derecognised only when the contractual rights to cash flows expire or are settled, or substantially all the risks and rewards of ownership are transferred to another party. A financial liability (or part thereof) is derecognised when the obligation specified in the contract is discharged, cancelled or expires.
3. Accounting developments
New and amended IFRS that are effective for the current year
In the year, the Group adopted one new IFRS, issued by the International Accounting Standards Board (IASB) that is effective for an annual period that begins on or after 1 January 2019 (and has been endorsed for use within the EU). IFRS 16 replaces IAS 17 'leases'.
- IFRS 16 leases
The Group leases offices, equipment and vehicles. Rental contracts are for periods of between 3 and 25 years. Lease terms are negotiated on a lease by lease basis and contain a variety of terms and conditions.
The main change on application of IFRS 16 is the accounting for 'operating leases' where rentals payable (as adjusted for lease incentives) were previously expensed under IAS 17 on a straight-line basis over the lease term.
Under IFRS 16 a right-of-use asset and a lease liability are recognised for all leases except 'low-value' and 'short' term leases where lease payments are recognised on a straight-line basis over the lease term.
The group has applied IFRS 16 retrospectively to all leases but has elected to recognise the cumulative effect against opening reserves at 1 May 2019. Therefore the comparative figures are as previously reported under IAS 17. The Group has applied this approach subject to the transition provisions as set out below:
• the use of a single discount rate for a portfolio of leases with reasonably similar characteristics
• reliance on previous assessments on whether leases are onerous at 1 May 2019 and reducing the right-of-use asset value by that amount;
• initial direct costs have been excluded from the measurement of the right-of-use asset; and
• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
On the Statement of Financial Position, a new category of fixed asset (right-of-use) has been created to recognise the value of right-of-use assets, whilst the full liability of leases has been recognised within both current and non-current liabilities. Over the life of the leases, the right-of-use asset will be depreciated and interest will be charged on the liability; these charges will replace the cost of operating leases which has previously been charged as part of administrative expenses. On the Statement of Cash Flows, payments of leases are treated as financing activities; these payments previously formed part of operating cash flow.
The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.
Operating leases under IAS 17, except 'low value' and 'short-term' leases
The lease liability is measured and the present value of the remaining lease payments at 1 May 2019, discounted at the lessee's incremental borrowing rate at that date.
The right-of-use asset is either
• measured as if IFRS 16 had been applied from commencement of the lease, but using the lessee's incremental borrowing rate at 1 May 2019 to discount future payments; or
• measured at the amount of the lease liability recognised in accordance with the measurement set out above, adjusted for accrued or prepaid operating lease payments at 1 May 2019.
This measurement has been made on a 'lease by lease' basis.
'Low value ' leases
When the value of an underlying asset (if new) at 1 May 2019 is £4,000 or less, the Group has continued to recognise the lease payments associated with those leases on a straight line basis over the lease term.
'Short term' leases
Where the lease ends before 30 April 2020, the Group has continued to recognise the lease payments associated with those leases on a straight line basis over the lease term
The impact of IFRS 16 is detailed further in note 37.
The following accounting policies were applied to leases in the year ended 30 April 2019:
Where assets are financed by leasing agreements that give rights approximating to ownership ("finance leases"), the assets are treated as if they had been purchased outright. The amount capitalised is the present value of the minimum lease payments payable during the lease term. The corresponding leasing commitments are shown as obligations to the lessor.
Lease payments are treated as consisting of capital and interest elements, and the interest is charged to the Statement of Comprehensive Income in proportion to the remaining balance outstanding.
All other leases are "operating leases" and the annual rentals are charged to the Statement of Comprehensive Income on a straight line basis over the lease term.
During the year ended 30 April 2019, operating lease rentals of £2,104,000 were charged to other operating charges.
New and revised IFRS in issue but not yet effective
At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRSs that have been issued but are not yet effective and in some cases have not yet been adopted by the EU:
|
Revised IFRS |
|
Effective date |
|
IFRS 3 |
Business Combinations |
1 January 2020 |
|
IFRS 17 |
Insurance Contracts |
1 January 2021 |
The directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods.
4. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, which are described in note 2, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Critical accounting judgements
The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.
Amounts recoverable on contracts - contingent fee arrangements
A level of judgement is required to determine the likelihood of success of a given matter for contingent fee arrangements. This is determined on a contract-by-contract basis after considering the relevant facts and circumstances surrounding each matter. The valuation exercise is conducted by experienced fee earners with detailed understanding of the cases. The carrying value of contingent fee arrangements at 30 April 2020 was £4,114,000 (2019: £2,201,000).
IFRS 16
The Group has applied judgement in applying the following transition provisions of IFRS 16:
• determining whether leases have similar characteristics to apply a single discount rate
• lease portfolios have been grouped between leases of properties and office equipment. These classes of asset have similar lease terms.
In applying IFRS 16, the Group uses judgement to assess whether the interest rate implicit in the lease is readily determinable. When the interest rate implicit in the lease is not readily determinable, the Group estimates the incremental borrowing rate based on its external borrowings secured against similar assets, adjusted for the term of the lease.
An increase in the rate adopted of 2% would have the following impact on the reported results for 30 April 2020:
Statement of Financial Position: Right-of-Use Assets - reduction of £2,190,000; Lease liabilities - reduction of £2,096,000.
Statement of Comprehensive Income: Interest costs - increase of £260,000; Depreciation - reduction of £166,000.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty in the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
IFRS 16
The Group makes estimates of the cost of restoring leased assets to their original condition when required to do so under the terms and conditions of the lease. Those estimates are based on the current condition of the leased assets and past experience of restoration costs.
Amounts recoverable on contracts - recoverable amounts
The valuation of amounts recoverable on contracts ("AROC") involves the use of estimates of the likely recovery rate which will be made on the gross value of chargeable time recorded to each matter.
This percentage represents management's best estimate of future value following a line by line review of the matters by fee earners. The estimation process takes into account the progress of the case at the reporting date, the estimated eventual fee payable by the client and the amount of time which will be incurred by fee earners in bringing the matter to a successful conclusion. The amount recognised in AROC at the year end was £21,507,000 (2019: £11,112,000), A 3% change in the estimated recovery of all matters would impact the profit for the period by approximately £990,000 (2019: £455,000).
Accounting for business combinations and valuation of intangibles
Business combinations are accounted for at fair value. The valuation of goodwill and acquired intangibles is calculated separately on each individual acquisition. In attributing value to intangible assets arising on acquisition, management has made certain assumptions in relation to the expected growth rates, profitability, length of key customer relationships and the appropriate weighted average cost of capital ('WACC') and internal rate of return ('IRR').
The value attributable to the intangible assets acquired on acquisitions also impacts the deferred tax provision relating to these items.
The total carrying value of acquired intangibles arising from business combinations in the year is £24,365,000 (2019: £27,247,000).
In order to assess the impact of the key assumptions on the values disclosed in the accounts the directors have applied the following sensitivities to the acquisitions in the current year:
|
Key assumption |
Rate applied in the financial statements |
Sensitivity tested |
Annual profit impact |
Value of intangible assets |
|
Long term growth rate |
0% |
2% |
4 |
30 |
|
WACC and IRR |
16% - 33% (1) |
5% |
126 |
(340) |
|
Length of customer relationships |
5-15 years |
5 years |
165 |
(356) |
(1) each acquisition has been reviewed and, dependent upon the structure of the acquisition, an appropriate WACC or IRR rate has been applied. These sensitivities have been calculated adjusting the adopted rates as noted above.
Growth rates are estimated based on the current conditions at the date of each acquisition with reference to independent surveys of future growth rates in the legal profession in real, inflation adjusted terms.
The length of customer relationships is estimated by considering the length of time the acquiree has had its significant client relationships up to the date of acquisition and historic customer attrition rates as appropriate.
The Directors consider the resulting valuations used give a reasonable approximation as to the value of the intangibles acquired and that any reasonably possible change in any one of the estimations in isolation would not have a material impact on the financial statements.
The Directors undertake an annual impairment review of goodwill to assess whether the carrying value is still supported by using a discounted cash flow model to derive the value in use of the cash generating unit ('CGU'). Cash flow forecasts are derived from the most recent financial budgets approved by management for the next two years and extrapolated using a terminal value calculation.
The key assumptions for the value in use calculations are those regarding the discount rates and growth rates for the Group's revenues from legal and professional services and the gross profit margin. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGU.
Revenue growth over the two years of the forecast period reflects, for 2021, the current run rate of revenue from the Group's existing business and a full year of revenue from acquisitions made during the year ended 30 April 2020, with an element of growth in 2022. The long term growth rate of 2% (2019: 3%) is based on UK economic growth forecasts for the legal services market.
The Group has conducted a sensitivity analysis on the impairment test of the CGU value in use. A reduction in the projected revenues for 2021 and 2022 of 10% per annum would result in the carrying value equalling the value in use.
5. Revenue
All revenue is derived from contracts with customers and is recognised over time. As more fully explained in note 6, the Group's legal and professional services business operates as a single business unit so there are no relevant categories into which revenue can be disaggregated.
The transaction price allocated to unsatisfied performance obligations of contracts at 30 April 2020 is not required to be disclosed because it is comprised of contracts that are expected to have a duration of one year or less.
6. Segmental reporting
The Board of Directors, as the chief operating decision-making body, reviews financial information for and makes decisions about the Group's overall legal and professional services business and has identified a single operating segment, that of legal and professional services operating entirely in the UK.
The legal and professional services business operates through a number of different service lines and in different locations; however, management effort is consistently directed to the firm operating as a single segment. No segmental reporting disclosure is therefore provided as all revenue is derived from this single segment.
7. Other operating income
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Other income |
495 |
253 |
|
Bank interest |
399 |
162 |
|
|
894 |
415 |
8. Staff costs
The average monthly number of employees (including executive directors) of the Group was:
|
|
Year ended 30 April 2020 Number |
Year ended 30 April 2019 Number |
|
Fee earners |
664 |
430 |
|
Other employees |
168 |
123 |
|
|
832 |
553 |
Their aggregate remuneration comprised:
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Wages and salaries |
40,290 |
26,284 |
|
Social security costs |
4,244 |
2,792 |
|
Other pension costs |
2,938 |
614 |
|
Other employment costs |
1,058 |
628 |
|
Aggregate remuneration of employees |
48,530 |
30,318 |
|
One off redundancy costs analysed as non-underlying costs (note 13) |
(2,952) |
(712) |
|
Movement in contract assets relating to staff costs |
- |
(73) |
|
Members' costs |
- |
604 |
|
Underlying staff costs in Statement of Comprehensive Income |
45,578 |
30,137 |
Members' costs relate to the remuneration of members of the Group's LLPs.
Directors' remuneration
Companies Act disclosures
The total amounts for directors' remuneration in accordance with Schedule 5 to the Accounting Regulations were as follows:
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Salaries, fees, bonuses and benefits in kind |
698 |
444 |
|
Money purchase pension contributions |
10 |
5 |
|
|
708 |
449 |
The number of directors to whom benefits are accruing under money purchase pension schemes is 2 (2019: 3).
|
The remuneration of the highest paid director was: |
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Salaries, fees, bonuses and benefits in kind |
231 |
142 |
|
Money purchase pension contributions |
- |
1 |
|
|
231 |
143 |
9. Share-based payments
The Group issues equity-settled share-based payments to its employees. The Group recognised total expenses of £789,000 (2019: £356,000) relating to equity-settled share-based payment transactions in the year.
Any charges relating to schemes introduced as one-off schemes as part of the listing are included in non-underlying costs because the directors view these schemes as a reward to employees for their past performance prior to the IPO. All charges relating to other recurring LTIP or SAYE schemes are included as a normal operating expense.
The following schemes were in place during the period.
Omnibus Plan
The Omnibus Plan is a discretionary share plan, which is administered, and the grant of awards is supervised by, the Remuneration Committee.
Three forms of award are available under the Omnibus Plan, as considered appropriate by the Remuneration Committee, as follows:
a) "Restricted Stock Awards": Awards granted in the form of nil or nominal cost share options, subject to time-based vesting requirements and continued employment within the Group. No performance targets will apply to Restricted Stock Awards.
b) "Performance Share Awards": Awards granted in the form of nil or nominal cost share options, whereby vesting is subject to satisfaction of performance conditions and continued employment within the Group.
c) "Share Options": Awards granted in form of a share option with an exercise price equal to the market value of an Ordinary share at the time of grant, subject to continued employment within the Group. Share Options may or may not be subject to performance conditions.
|
|
Restricted stock awards |
Performance share awards |
||
|
|
Number |
Weighted average exercise price Pence |
Number |
Weighted average exercise price Pence |
|
|
|
|
|
|
|
Outstanding at 30 April 2018 |
- |
- |
- |
- |
|
Granted during the period |
451,845 |
0.2 |
63,352 |
0.2 |
|
Outstanding at 30 April 2019 |
451,845 |
0.2 |
63,352 |
0.2 |
|
Granted during the period |
129,112 |
- |
142,862 |
- |
|
Forfeited during the period |
(11,104) |
- |
- |
- |
|
Exercised during the period |
(28,967) |
- |
- |
- |
|
Outstanding at 30 April 2020 |
540,886 |
0.2 |
206,214 |
0.2 |
|
Exercisable at 30 April 2020 |
53,819 |
0.2 |
- |
- |
The options outstanding at 30 April 2020 had a weighted average exercise price of 0.2p and a weighted average remaining contractual life of 2.1 years.
In the period the following restricted stock awards were granted; 21,353 options were granted on 9 July 2019, 31,250 options were granted on 1 November 2019, 18,669 options were granted on 9 March 2020 and 57,840 options were granted on 24 April 2020. In addition 142,862 of performance share awards were granted on 10 March 2020.
The aggregate of the estimated fair values of the options granted on these dates is £1,051,000. The inputs into the valuation model are as follows:
|
Weighted average share price |
387p |
|
Weighted average exercise price |
0.2p |
|
Weighted average expected life |
2.1 years |
Share Incentive Plan ("SIP")
The SIP is an "all employee" scheme under which every eligible employee within the Group was invited to participate. Eligible employees could apply to invest up to £1,800 from pre-tax income in partnership shares; matching shares were awarded on the basis of 2 free matching shares for each partnership share purchased. The matching shares are forfeited if the employee leaves within 3 years of the grant date.
|
|
Partnership Shares |
Matching Shares |
|
|
|
|
|
Outstanding at 30 April 2018 |
- |
- |
|
Granted during the period |
219,244 |
438,488 |
|
Withdrawn during the period |
(15,071) |
- |
|
Forfeited during the period |
- |
(30,141) |
|
Outstanding at 30 April 2019 |
204,173 |
408,347 |
|
Withdrawn during the period |
(22,649) |
- |
|
Forfeited during the period |
- |
(45,298) |
|
Outstanding at 30 April 2020 |
181,524 |
363,049 |
|
Unrestricted at 30 April 2020 |
- |
- |
Sharesave Scheme ("SAYE")
This is an HMRC approved scheme and is open to any person that was an employee or officer of the Group at the launch date of each scheme. Under the scheme, members save a fixed amount each month for three years. Subject to remaining in employment by the Group, at the end of the three-year period they are entitled to use these savings to buy shares in the Company at 80% of the market value at launch date.
The first scheme was launched in November 2018 and a new scheme was launched in February 2020.
|
|
SAYE options |
|
|
|
Number |
Weighted average exercise price |
|
|
|
|
|
Outstanding at 30 April 2018 |
- |
- |
|
Granted during the period |
900,785 |
162 |
|
Forfeited during the period |
(4,350) |
- |
|
Outstanding at 30 April 2019 |
896,435 |
162 |
|
Granted during the period |
664,796 |
361 |
|
Forfeited during the period |
(188,681) |
221 |
|
Exercised during the period |
(12,361) |
162 |
|
Outstanding at 30 April 2020 |
1,360,189 |
251 |
|
Exercisable at 30 April 2020 |
- |
- |
The options outstanding at 30 April 2020 had a weighted average exercise price of 251p and a weighted average remaining contractual life of 2.3 years.
November 2018 scheme
The aggregate of the estimated fair values of the options granted is £500,000. The inputs into the Black-Scholes model are as follows:
|
Exercise price |
162p |
|
Expected volatility |
39.2% |
|
Expected life |
3.1 years |
|
Risk-free rate |
1.4% |
|
Expected dividend yield |
1.1% |
February 2020 scheme
In the period, 664,796 options were granted on 21 February 2020. The aggregate of the estimated fair values of the options granted is £1,163,000. The inputs into the Black-Scholes model are as follows:
|
Exercise price |
361p |
|
Expected volatility |
34.3% |
|
Expected life |
3.1 years |
|
Risk-free rate |
1.1% |
|
Expected dividend yield |
0.7% |
Expected volatility was determined by using historical share price data of the Company since it listed on 29 June 2018. The expected life used in the model has been based on management's best estimate after considering exercise restrictions and behavioural considerations.
Warrants
Warrants were issued to Numis Securities Limited on Admission in respect of their services and shall be exercisable for a period of five years.
|
|
Warrants |
|
|
|
Number |
Weighted average exercise price |
|
|
|
|
|
Outstanding at 30 April 2018 |
- |
- |
|
Granted during the period |
706,897 |
1.7 |
|
Outstanding at 30 April 2019 |
706,897 |
1.7 |
|
Exercised during the period |
(706,897) |
- |
|
Outstanding at 30 April 2020 |
- |
- |
The warrants were exercised in the period and raised £1,230,000.
10. Retirement benefit schemes
The Group operates a defined contribution pension scheme for employees. The total cost charged to income of £2,931,000 (2019: £614,000) represents contributions payable to the scheme by the Group. As at 30 April 2020, contributions of £281,000 (2019: £207,000) due in respect of the reporting period had not been paid over to the schemes.
The defined benefit scheme is discussed in note 38. There were no charges against income in the year ended 30 April 2020.
11. Depreciation and amortisation charges
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Depreciation |
858 |
702 |
|
Depreciation on right-of-use assets |
1,909 |
- |
|
Amortisation |
1,501 |
757 |
|
Loss on disposal of property, plant and equipment |
8 |
14 |
|
|
4,276 |
1,473 |
12. Other operating charges
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Establishment costs |
2,335 |
3,184 |
|
Short term and low value lease costs |
161 |
- |
|
Other overhead expenses |
9,008 |
7,980 |
|
|
11,504 |
11,164 |
13. Non-underlying operating costs
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Redundancy and reorganisation costs |
2,952 |
712 |
|
Transaction costs |
1,532 |
602 |
|
Loss on disposal |
97 |
- |
|
Share based payment charges |
513 |
300 |
|
Contingent consideration |
2,996 |
233 |
|
|
8,090 |
1,847 |
Non-underlying costs relate to redundancy costs to streamline the support function of the Group following acquisitions and in FY20 as a result of reorganisation actions taken in relation to the impact of COVID19, transaction costs in respect of acquisitions, the placing of new shares during the period and share based payment charges relating to one off share schemes offered to employees as part of the IPO.
Contingent consideration is included in non-underlying costs as it represents payments agreed under the terms of the sale and purchase agreements with vendors of certain businesses acquired which are contingent on the continued employment of those individuals with the Group. The payments extend over periods of one to three years and are designed to preserve the value of goodwill and customer relationships acquired in the business combinations. IFRS requires such arrangements to be treated as remuneration and charged to the Statement of Comprehensive Income. The individuals also receive market rate salaries for their work, in line with other similar members of staff in the Group. The contingent earnout payments are significantly in excess of these market salaries and would distort the Group's results if not separately identified.
14. Finance costs
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Interest on borrowings |
628 |
695 |
|
Interest on leases |
790 |
- |
|
Bank arrangement fees |
71 |
39 |
|
Exit and release of arrangement fees arising on the repayment of debt at the IPO |
- |
1,924 |
|
Interest on deferred consideration |
41 |
114 |
|
Other interest payable |
- |
4 |
|
|
1,530 |
2,776 |
15. Auditor's remuneration
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Fees payable to the parent company's auditor and their associates for the audit of the parent company's annual accounts |
29 |
21 |
|
Fees payable to the auditor and their associates for other services to the Group: |
|
|
|
- The audit of the Company's subsidiaries |
95 |
38 |
|
Total audit fees |
124 |
59 |
|
|
|
|
|
- Audit-related assurance services |
21 |
21 |
|
- Taxation advisory services |
- |
7 |
|
- Corporate finance services |
- |
80 |
|
- Other advisory services |
3 |
63 |
|
Total non-audit fees |
24 |
171 |
In addition to the above in the year ended 30 April 2020 £5,000 of non audit costs relating to tax services have been charged to the share premium account in the year. For the year ended 30 April 2019 £95,000 was charged to the share premium account in relation to corporate finance services.
Fees payable to the auditor and its associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements disclose such fees on a consolidated basis.
16. Taxation
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Corporation tax: |
|
|
|
Current year |
1,915 |
1,327 |
|
Adjustments in respect of prior years |
(20) |
- |
|
|
1,895 |
1,327 |
|
Deferred tax: |
|
|
|
Origination and reversal of temporary differences |
343 |
(87) |
|
|
|
|
|
Tax expense for the year |
2,238 |
1,240 |
The charge for the period can be reconciled to the Statement of Comprehensive Income as follows:
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Profit before tax |
4,058 |
5,241 |
|
Tax at the UK corporation tax rate of 19% (2019: 19%) |
771 |
995 |
|
Expenses that are not deductible in determining taxable profit |
1,487 |
245 |
|
Adjustment in respect of prior years |
(20) |
- |
|
Effect of changes in tax rates |
- |
- |
|
Tax expense for the year |
2,238 |
1,240 |
The impact of non-underlying costs on the effective rate of tax is set out below:
|
|
Year ended 30 April 2020 |
Year ended 30 April 2019 |
||||
|
|
Total
£'000 |
Underlying |
Non-Underlying £'000 |
Total
£'000 |
Underlying
£'000 |
Non-Underlying £'000 |
|
Profit before tax |
4,058 |
13,616 |
(9,558) |
5,241 |
9,819 |
(4,578)
|
|
Tax expense |
(2,238) |
(2,910) |
672 |
(1,240) |
(1,678) |
438
|
|
Effective rate of tax |
55% |
21% |
(7%) |
24% |
17% |
(10%) |
17. Earnings per share
Basic and diluted earnings per share have been calculated using profit after tax and the weighted average number of ordinary shares in issue during the period.
|
|
Year ended 30 April 2020 Number |
Year ended 30 April 2019 Number |
|
Weighted average number of ordinary shares for the purposes of basic earnings per share |
74,675,462 |
68,533,094 |
|
Effect of dilutive potential ordinary shares: |
|
|
|
Share options |
724,542 |
194,389 |
|
Warrants |
- |
117,350 |
|
Weighted average number of ordinary shares for the purposes of diluted earnings per share |
75,400,004 |
68,844,833 |
|
|
£'000 |
£'000 |
|
Profit after tax |
1,820 |
4,001 |
|
Earnings per share |
Pence |
Pence |
|
Basic earnings per share |
2.44 |
5.84 |
|
Diluted earnings per share |
2.41 |
5.81 |
The denominators for the purposes of calculating both basic and diluted earnings per share have been adjusted to reflect the group reorganisation with Knights 1759 Limited and the subdivision of ordinary shares in the period ended 30 April 2019.
Adjusted earnings per share is calculated as an alternative performance measure in note 36.
18. Dividends
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Amounts recognised as distributions to equity holders in the year: |
|
|
|
Final dividend for the year ended 30 April 2019 - paid in September 2019 |
931 |
|
|
Interim dividend for the year ended 30 April 2020 of 1.10p per share, paid in March 2020 (2019: 0.60p per share) |
824 |
433 |
|
|
1,755 |
433 |
|
|
|
|
|
Proposed final dividend for the year ended 30 April 2020 of 0p per share (2019: 1.27p per share) |
- |
931 |
Due to the COVID-19 pandemic and the resultant uncertainty of the effects on the UK economy the Board has decided not to propose a final dividend for the year ended 30 April 2020.
19. Intangible assets and goodwill
|
|
Goodwill £'000 |
Brand £'000 |
Customer relationships £'000 |
Purchased computer software £'000 |
Total £'000 |
|
Cost |
|
|
|
|
|
|
As at 1 May 2018 |
12,244 |
5,401 |
2,496 |
256 |
20,397 |
|
Acquisitions of subsidiaries |
14,363 |
- |
12,884 |
- |
27,247 |
|
Additions |
- |
- |
- |
90 |
90 |
|
As at 30 April 2019 |
26,607 |
5,401 |
15,380 |
346 |
47,734 |
|
Acquisitions of subsidiaries |
13,270 |
- |
11,095 |
- |
24,365 |
|
Adjustment in respect of consideration not payable |
(199) |
- |
- |
- |
(199) |
|
Additions |
- |
- |
- |
26 |
26 |
|
As at 30 April 2020 |
39,678 |
5,401 |
26,475 |
372 |
71,926 |
|
|
|
|
|
|
|
|
Amortisation and impairment |
|
|
|
|
|
|
As at 1 May 2018 |
- |
162 |
268 |
103 |
533 |
|
Amortisation charge |
- |
54 |
639 |
64 |
757 |
|
As at 30 April 2019 |
- |
216 |
907 |
167 |
1,290 |
|
Amortisation charge |
- |
54 |
1,373 |
74 |
1,501 |
|
As at 30 April 2020 |
- |
270 |
2,280 |
241 |
2,791 |
|
|
|
|
|
|
|
|
Carrying amount |
|
|
|
|
|
|
At 30 April 2020 |
39,678 |
5,131 |
24,195 |
131 |
69,135 |
|
At 30 April 2019 |
26,607 |
5,185 |
14,473 |
179 |
46,444 |
|
At 1 May 2018 |
12,244 |
5,239 |
2,228 |
153 |
19,864 |
The carrying amount of goodwill of £39.7 million (2019: £26.6 million) has been allocated to the single cash generating unit (CGU) present in the business, which is the provision of legal and professional services.
The recoverable amount of the Group's goodwill has been determined by a value-in-use calculation using a discounted cash flow model. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next two years and extrapolates cash using a terminal value calculation based on an estimated growth rate of 2% (2019: 3%). This rate does not exceed the expected average long-term growth rate for the UK legal services market.
The key assumptions for the value in use calculations are those regarding the discount rates and growth rates for the Group's revenues from legal and professional services and the gross profit margin. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGU.
The rate used to discount the forecast cash flows is 19.4% (2019: 16.6%).
Revenue growth over the two years of the forecast period reflects, for 2021, the current run rate of revenue from the Group's existing business and a full year of revenue from acquisitions made during the year ended 30 April 2020, with an element of growth in 2022. The long term growth rate of 2% (2019: 3%) is based on UK economic growth forecasts for the legal services market.
The Group has conducted a sensitivity analysis on the impairment test of the CGU value in use. A reduction in the projected revenues for 2021 and 2022 of 10% per annum would result in the carrying value equalling the value in use.
20. Acquisitions
Acquisitions summary
During the year the Group has completed six acquisitions, the table below summarises the consideration paid
and the net cash flow arising on all acquisitions in the period.
|
Total £'000 |
|||
|
Total identifiable assets and liabilities acquired |
|
|
22,628 |
|
Goodwill |
|
|
13,270 |
|
Total consideration |
|
|
35,898 |
|
Satisfied by: |
|
|
Cash |
21,424 |
|
Equity instruments (3,240,644 ordinary shares of Knights Group Holdings plc) |
13,167 |
|
Deferred consideration arrangement |
1,307 |
|
Total consideration transferred |
35,898 |
|
|
|
|
Net cash outflows arising on acquisition: |
|
|
Cash consideration (net of cash acquired) |
11,907 |
|
Net investing cash outflow arising on acquisition |
11,907 |
|
|
|
|
Repayment of debt acquired |
7,049 |
|
Net financing cash outflow arising on acquisition |
7,049 |
Details for the individual acquisitions are included below
Dakeyne Emms Gilmore Liberson Limited ('EGL')
On 1 November 2019, the Group exchanged contracts to acquire EGL through the agreement to purchase the shares of the entity. This acquisition completed on 29 November 2019. EGL is a law firm based in Birmingham and it was acquired to assist the Group in entering the Birmingham legal and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
|
|
Carrying amount |
Fair value adjustment |
Total |
|
Identifiable assets |
|
|
|
|
Identifiable intangible assets |
- |
1,448 |
1,448 |
|
Property, plant and equipment |
45 |
(45) |
- |
|
Contract assets |
874 |
- |
874 |
|
Trade and other receivables |
992 |
- |
992 |
|
Cash and cash equivalents |
2,524 |
- |
2,524 |
|
Liabilities |
|
|
|
|
Trade and other payables |
(1,155) |
- |
(1,155) |
|
Provisions |
(71) |
- |
(71) |
|
Deferred tax |
(11) |
(246) |
(257) |
|
Total identifiable assets and liabilities |
3,198 |
1,157 |
4,355 |
|
Goodwill |
|
|
661 |
|
Total consideration |
|
|
5,016 |
|
Satisfied by: |
|
|
Cash |
3,349 |
|
Equity instruments (515,057 ordinary shares of Knights Group Holdings plc) |
1,667 |
|
Total consideration transferred |
5,016 |
|
|
|
|
Net cash outflow arising on acquisition: |
|
|
Cash consideration (net of cash acquired) |
1,125 |
|
Repayment of debt |
82 |
|
Net cash outflow arising on acquisition |
1,207 |
The goodwill of £661,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the ordinary shares issued as part of the consideration was determined on the basis of the volume weighted average share price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in employment by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income on a straight line basis over the 2 year post acquisition period. The maximum undiscounted amount of all potential future payments under the contingent consideration arrangement is £1,667,000 and is payable from 31 May 2020 to 31 October 2021 in regular instalments.
EGL contributed £1,890,000 of revenue to the Group's Statement of Comprehensive Income for the period from 1 November 2019 to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights Professional Services Limited from 29 November 2019.
ERT Law Limited ('ERT')
On 3 January 2020, the Group exchanged contracts to acquire ERT through the agreement to purchase the shares of the entity. This acquisition completed on 17 January 2020. ERT is a law firm based in Birmingham and it was acquired to enhance the Groups presence in the Birmingham legal and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
|
|
Carrying amount |
Fair value adjustment |
Total |
|
Identifiable assets |
|
|
|
|
Identifiable intangible assets |
- |
906 |
906 |
|
Property, plant and equipment |
29 |
(11) |
18 |
|
Right-of-use assets |
- |
101 |
101 |
|
Contract assets |
267 |
- |
267 |
|
Trade and other receivables |
419 |
- |
419 |
|
Cash and cash equivalents |
462 |
- |
462 |
|
Liabilities |
|
|
|
|
Trade and other payables |
(464) |
- |
(464) |
|
Lease liabilities |
- |
(101) |
(101) |
|
Provisions |
(100) |
- |
(100) |
|
Deferred tax |
(1) |
(154) |
(155) |
|
Total identifiable assets and liabilities |
612 |
741 |
1,353 |
|
Goodwill |
|
|
644 |
|
Total consideration |
|
|
1,997 |
|
Satisfied by: |
|
|
Cash |
1,097 |
|
Equity instruments (262,899 ordinary shares of Knights Group Holdings plc) |
900 |
|
Total consideration transferred |
1,997 |
|
|
|
|
Net cash outflow arising on acquisition: |
|
|
Cash consideration (net of cash acquired) |
635 |
|
Repayment of debt |
143 |
|
Net cash outflow arising on acquisition |
778 |
The goodwill of £644,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the ordinary shares issued as part of the consideration was determined on the basis of the volume weighted average share price for the 5 days prior to completion.
ERT contributed £778,000 of revenue to the Group's Statement of Comprehensive Income for the period from 3 January 2020 to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights Professional Services Limited from 17 January 2020.
Croftons Solicitors LLP ('Croftons')
On 31 January 2020 the Group acquired Croftons by purchasing the controlling membership interests of the entity. Croftons is a law firm based in Manchester and it was acquired to further expand the Group's legal and professional services offering in the Manchester market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
|
|
Carrying amount |
Fair value adjustment |
Total |
|
Identifiable assets |
|
|
|
|
Identifiable intangible assets |
300 |
483 |
783 |
|
Property, plant and equipment |
174 |
(119) |
55 |
|
Contract assets |
296 |
- |
296 |
|
Trade and other receivables |
682 |
- |
682 |
|
Cash and cash equivalents |
980 |
- |
980 |
|
Liabilities |
|
|
|
|
Trade and other payables |
(431) |
- |
(431) |
|
Provisions |
(8) |
(81) |
(89) |
|
Deferred tax |
- |
(133) |
(133) |
|
Total identifiable assets and liabilities |
1,993 |
150 |
2,143 |
|
Goodwill |
|
|
471 |
|
Total consideration |
|
|
2,614 |
|
Satisfied by: |
|
|
Cash |
1,910 |
|
Equity instruments (163,086 ordinary shares of Knights Group Holdings plc) |
704 |
|
Total consideration transferred |
2,614 |
|
|
|
|
Net cash outflow arising on acquisition: |
|
|
Cash consideration (net of cash acquired) |
519 |
|
Repayment of debt |
410 |
|
Net cash outflow arising on acquisition |
929 |
The goodwill of £471,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the ordinary shares issued as part of the consideration was determined on the basis of the volume weighted average share price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in employment by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income on a straight line basis. The maximum undiscounted amount of all potential future payments under the contingent consideration arrangement is £704,000 and is payable in equal instalments over the two years post completion.
Croftons contributed £921,000 of revenue to the Group's Statement of Comprehensive Income for the period from 31 January 2020 to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights Professional Services Limited from 31 January 2020.
Fraser Brown Solicitors ('Fraser Brown')
On 14 February 2020, the Group exchanged contracts to acquire Fraser Brown through the agreement to purchase the controlling membership interests of the partnership. This acquisition completed on 27 March 2020. Fraser Brown is a law firm based in Nottingham and it was acquired to assist the Group in entering the Nottingham legal and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
|
|
Carrying amount |
Fair value adjustment |
Total |
|
Identifiable assets |
|
|
|
|
Identifiable intangible assets |
- |
1,492 |
1,492 |
|
Property, plant and equipment |
762 |
(591) |
171 |
|
Right-of-use assets |
- |
84 |
84 |
|
Contract assets |
807 |
- |
807 |
|
Trade and other receivables |
1,293 |
(208) |
1,085 |
|
Cash and cash equivalents |
1,404 |
- |
1,404 |
|
Liabilities |
|
|
|
|
Trade and other payables |
(1,513) |
- |
(1,513) |
|
Lease liabilities |
- |
(84) |
(84) |
|
Borrowings |
(651) |
- |
(651) |
|
Directors Loan Accounts |
1,253 |
- |
1,253 |
|
Provisions |
- |
(159) |
(159) |
|
Deferred tax |
- |
(254) |
(254) |
|
Total identifiable assets and liabilities |
3,355 |
280 |
3,635 |
|
Goodwill |
|
|
4,006 |
|
Total consideration |
|
|
7,641 |
|
Satisfied by: |
|
|
Cash |
4,258 |
|
Equity instruments (680,911 ordinary shares of Knights Group Holdings plc) |
3,033 |
|
Deferred consideration arrangement |
350 |
|
Total consideration transferred |
7,641 |
|
|
|
|
Net cash outflow arising on acquisition: |
|
|
Cash consideration (net of cash acquired) |
2,055 |
|
Repayment of debt |
197 |
|
Net cash outflow arising on acquisition |
2,252 |
The goodwill of £4,006,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the ordinary shares issued as part of the consideration was determined on the basis of the volume weighted average share price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in employment by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income on a straight line basis. The maximum undiscounted amount of all potential future payments under the contingent consideration arrangement is £2,066,000 and is payable in instalments from May 2020 to February 2022.
There are also deferred consideration payments totalling £350,000 outstanding. This is payable in instalments on the first and second anniversary of completion.
Fraser Brown contributed £1,674,000 of revenue to the Group's Statement of Comprehensive Income for the period 14 February 2020 and 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights Professional Services Limited from 27 March 2020.
ASB Law LLP and Aspire LLP ('ASB' and 'Aspire')
On 5 March 2020, the Group exchanged contracts to acquire ASB and Aspire through the agreement to purchase the controlling membership interests of the entities. This acquisition completed on 17 April 2020. ASB and Aspire are law firms based in Maidstone and Crawley and were acquired to assist the Group in entering the legal and professional services market in the South East region.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
|
|
Carrying amount |
Fair value adjustment |
Total |
|
Identifiable assets |
|
|
|
|
Identifiable intangible assets |
616 |
1,168 |
1,784 |
|
Property, plant and equipment |
186 |
(11) |
175 |
|
Right-of-use assets |
- |
1,204 |
1,204 |
|
Contract assets |
3,274 |
- |
3,274 |
|
Trade and other receivables |
6,189 |
- |
6,189 |
|
Cash and cash equivalents |
40 |
- |
40 |
|
Liabilities |
|
|
|
|
Trade and other payables |
(4,572) |
109 |
(4,463) |
|
Lease liabilities |
- |
(1,204) |
(1,204) |
|
Borrowings |
(2,477) |
- |
(2,477) |
|
Provisions |
(155) |
- |
(155) |
|
Deferred tax |
- |
(303) |
(303) |
|
Total identifiable assets and liabilities |
3,101 |
963 |
4,064 |
|
Goodwill |
|
|
1,438 |
|
Total consideration |
|
|
5,502 |
|
Satisfied by: |
|
|
Cash |
4,282 |
|
Equity instruments (181,675 ordinary shares of Knights Group Holdings plc) |
770 |
|
Deferred consideration arrangement |
450 |
|
Total consideration transferred |
5,502 |
|
|
|
|
Net cash outflow arising on acquisition: |
|
|
Cash consideration (net of cash acquired) |
1,508 |
|
Repayment of debt |
5,212 |
|
Net cash outflow arising on acquisition |
6,720 |
The goodwill of £1,438,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the ordinary shares issued as part of the consideration was determined on the basis of the volume weighted average share price for the 5 days prior to completion.
Future payments under the deferred consideration arrangement total £450,000. This is payable in two equal instalments on the first and second anniversary of completion.
ASB and Aspire contributed £2,445,000 of revenue to the Group's Statement of Comprehensive Income for the period from 5 March 2020 to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights Professional Services Limited from 17 April 2020.
Shulmans LLP (Shulmans)
On 5 March 2020, the Group exchanged contracts to acquire Shulmans through the agreement to purchase the controlling membership interests of the entity. This acquisition completed on 24 April 2020. Shulmans is a law firm based in Leeds and it was acquired to assist the Group in entering the Leeds legal and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
|
|
Carrying amount |
Fair value adjustment |
Total |
|
Identifiable assets |
|
|
|
|
Identifiable intangible assets |
1,068 |
3,608 |
4,676 |
|
Property, plant and equipment |
745 |
(60) |
685 |
|
Right-of-use assets |
- |
3,126 |
3,126 |
|
Contract assets |
2,774 |
- |
2,774 |
|
Trade and other receivables |
3,185 |
(200) |
2,985 |
|
Cash and cash equivalents |
111 |
- |
111 |
|
Liabilities |
|
|
|
|
Trade and other payables |
(2,569) |
468 |
(2,101) |
|
Lease liabilities |
- |
(3,126) |
(3,126) |
|
Borrowings |
(1,005) |
- |
(1,005) |
|
Provisions |
(10) |
(242) |
(252) |
|
Deferred tax |
- |
(795) |
(795) |
|
Total identifiable assets and liabilities |
4,299 |
2,779 |
7,078 |
|
Goodwill |
|
|
6,050 |
|
Total consideration |
|
|
13,128 |
|
Satisfied by: |
|
|
Cash |
6,528 |
|
Equity instruments (1,437,016 ordinary shares of Knights Group Holdings plc) |
6,093 |
|
Deferred consideration arrangement |
507 |
|
Total consideration transferred |
13,128 |
|
|
|
|
Net cash outflow arising on acquisition: |
|
|
Cash consideration (net of cash acquired) |
6,065 |
|
Repayment of debt |
1,005 |
|
Net cash outflow arising on acquisition |
7,070 |
The goodwill of £6,050,000 arising from the acquisition represents of the assembled workforce. None of the goodwill is expected to be deductible for income tax purposes.
The fair value of the ordinary shares issued as part of the consideration was determined on the basis of the volume weighted average share price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in employment by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income on a straight line basis. The maximum undiscounted amount of all potential future payments under the contingent consideration arrangement is £5,708,000. This is payable in two instalments on the first and second anniversary of the completion date.
There are future deferred consideration payments of £507,000 of which £125,000 is payable in May 2020, £255,000 is payable on the first anniversary of the completion date and £127,000 is payable on the second anniversary.
Shulmans contributed £2,910,000 of revenue to the Group's Statement of Comprehensive Income for the period from 5 March 2020 to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights Professional Services Limited from 24 April 2020.
21. Property, plant and equipment
|
|
Expenditure on short leasehold property £'000 |
Office equipment £'000 |
Furniture and fittings £'000 |
Motor vehicles £'000 |
Right-of-use assets |
Total £'000 |
|
Cost |
|
|
|
|
|
|
|
As at 1 May 2018 |
1,401 |
1,192 |
825 |
5 |
- |
3,423 |
|
Acquisitions of subsidiaries |
9 |
155 |
210 |
- |
- |
374 |
|
Additions |
603 |
585 |
26 |
- |
- |
1,214 |
|
Disposals |
(7) |
- |
(12) |
- |
- |
(19) |
|
As at 30 April 2019 |
2,006 |
1,932 |
1,049 |
5 |
- |
4,992 |
|
IFRS 16 - right-of-use assets |
- |
- |
- |
- |
|
19,407 |
|
As at 1 May after IFRS 16 transition |
2,006 |
1,932 |
1,049 |
5 |
19,407 |
24,399 |
|
Acquisitions of subsidiaries |
367 |
586 |
151 |
- |
4,515 |
5,619 |
|
Additions |
1,129 |
982 |
12 |
- |
1,822 |
3,945 |
|
Disposals |
(1) |
(70) |
(217) |
(5) |
- |
(293) |
|
As at 30 April 2020 |
3,501 |
3,430 |
995 |
- |
25,744 |
33,670 |
|
|
|
|
|
|
|
|
|
Depreciation and impairment |
|
|
|
|
|
|
|
As at 1 May 2018 |
169 |
643 |
158 |
5 |
- |
975 |
|
Depreciation charge |
238 |
307 |
157 |
- |
- |
702 |
|
Eliminated on disposal |
(1) |
- |
(3) |
- |
- |
(4) |
|
As at 30 April 2019 |
406 |
950 |
312 |
5 |
- |
1,673 |
|
Depreciation charge |
250 |
494 |
114 |
- |
1,995 |
2,853 |
|
Eliminated on disposal |
- |
(4) |
(158) |
(5) |
- |
(167) |
|
As at 30 April 2020 |
656 |
1,440 |
268 |
- |
1,995 |
4,359 |
|
|
|
|
|
|
|
|
|
Carrying amount |
|
|
|
|
|
|
|
At 30 April 2020 |
2,845 |
1,990 |
727 |
- |
23,749 |
29,311 |
|
At 30 April 2019 |
1,600 |
982 |
737 |
- |
- |
3,319 |
|
At 1 May 2018 |
1,232 |
549 |
667 |
- |
- |
2,448 |
Depreciation of £86,000 (2019: £nil) is included in non underlying operating costs.
See note 37 for further details of Right-of-use assets.
22. Contract assets and liabilities
|
|
Contract assets £'000 |
Trade receivables £'000 |
Contract liabilities £'000 |
|
|
|
|
|
|
As at 30 April 2020 |
21,507 |
22,450 |
(177) |
|
As at 30 April 2019 |
11,112 |
10,720 |
(120) |
Contract assets
Contract assets consist of unbilled revenue in respect of legal and professional services performed to date.
Contract assets in respect of fee-for-service and fixed fee arrangements are billed at appropriate intervals, normally on a monthly basis in arrears, in line with the performance of the services. Where such matters remain unbilled at the period end the asset is valued on a contract-by-contract basis at its expected recoverable amount.
The Group undertakes some matters based on contingent fee arrangements. These matters are billed when the claim is successfully settled. For matters ongoing at the period end, each matter is valued based on its specific circumstances. If the matter has agreed funding arrangements in place, then it is valued based on the estimated amount recoverable from the funding depending on the stage of completion of the matter.
If the matter has been admitted and performance obligations satisfied, such that it is no longer contingent, these matters are valued based on the expected recoverable amount. Due to the complex nature of these matters, they can take a considerable time to be finalised therefore performance obligations may be settled in one period but the matter not billed until a later financial period. The amount of contingent fee work in progress at 30 April 2020 was £4,114,000 (2019: £2,201,000).
If the performance obligations for contingent matters have not been satisfied at the reporting date, these assets are valued on a contract-by-contract basis taking into account the expected recoverable amount and the likelihood of success. Where the likelihood of success of a contingent fee arrangement is less than highly probable, the amount recognised in contract assets is further reduced to reflect this uncertainty.
During the year, contract assets of £8,292,000 (2019: £1,877,000) were acquired in business combinations.
An impairment loss of £27,000 has been recognised in relation to contract assets in the year (2019: £57,000). This is based on the expected credit loss under IFRS 9 of these types of assets. The contract asset loss is estimated at 0.2% (2019: 0.5%) of the balance.
Trade receivables
Trade receivables are recognised when a bill has been issued to the client, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. Trade receivables also includes disbursements.
Bills are payable within thirty days unless otherwise agreed with the client.
Contract liabilities
When matters are billed in advance or on the basis of a monthly retainer, this is recognised in contract liabilities and released over time when the services are performed.
23. Trade and other receivables
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Trade receivables |
23,003 |
10,960 |
|
Impairment provision - Trade receivables |
(553) |
(240) |
|
Prepayments and other receivables |
4,596 |
3,008 |
|
Impairment provision - Prepayments and other receivables |
- |
(57) |
|
|
27,046 |
13,671 |
Trade receivables
The average credit period taken on sales is 42 days as at 30 April 2020 (2019: 38 days). No interest is charged on trade receivables. The Group uses appropriate methods to recover all balances once overdue. Once the expectation of recovery is deemed remote a debt may be written off.
The Group measures the loss allowance for trade receivables at an amount equal to lifetime expected credit losses ('ECL'). The Group applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. As the Group's historical credit loss experience does not show significantly different loss patterns for different client segments, the provision for loss allowance is based on past due status.
The following table details the risk profile of trade receivables (excluding disbursements) based on the Group's provision matrix.
|
30 April 2020 |
Not past due |
31-60 days past due |
61-90 days past due |
91-120 days past due |
>120 days past due |
Total |
||
|
Expected credit loss rate |
0.03% |
0.02% |
1.39% |
7.47% |
16.77% |
2.52% |
||
|
Estimated total gross carrying amount (£'000) |
9,868 |
4,233 |
1,454 |
|
|
18,374 |
||
|
Lifetime ECL £'000 |
3 |
1 |
20 |
28 |
411 |
463 |
||
In addition to the above on trade receivables a further £90,000 (2019: £39,000) impairment loss has been recognised against disbursement balances. This is based on 100% impairment against all disbursements with no activity on the matter for over 12 months and 0.2% against the remainder of the balance based upon the expected credit loss of this type of asset.
An impairment loss of £27,000 has recognised on contract assets in the year (2019: £57,000). This is based on the expected credit loss under IFRS 9 of these types of assets. The contract asset loss is estimated at 0.2% (2019: 0.5%)
Other receivables
As at 30 April 2020 other receivables includes £187,000 (2019: £513,000) of consideration paid in advance relating to the acquisition of Cummins Solicitors Limited which is contingent on continued employment over a two year period. This is being released to the Statement of Comprehensive Income over the two year period.
24. Share capital
|
|
Ordinary shares |
|
|
|
Number |
£'000 |
|
|
|
|
|
As at 1 May 2018 |
100,000 |
100 |
|
Ordinary shares of £1 each issued in respect of the share-for-share acquisition of Knights 1759 Limited |
- |
- |
|
Subdivision of 100,000 ordinary shares of £1 each into 50,000,000 ordinary shares of 0.2p each |
49,900,000 |
- |
|
Ordinary shares of 0.2p each issued at Initial Public Offering |
20,689,656 |
41 |
|
Ordinary shares of 0.2p each issued in respect of the Share Incentive Plan (see note 9) |
657,732 |
2 |
|
Ordinary shares of 0.2p each issued as consideration in the purchase of subsidiaries |
1,978,031 |
4 |
|
As at 30 April 2019 |
73,325,419 |
147 |
|
Changes during the period |
|
|
|
Ordinary shares of 0.2p each issued at share placing |
4,761,905 |
9 |
|
Ordinary shares of 0.2p each issued in respect of exercised share options |
41,328 |
1 |
|
Ordinary shares of 0.2p each issued in respect of exercised share options equivalent to dividend entitlement |
139 |
- |
|
Ordinary shares of 0.2p each issued in respect of exercised share warrants |
706,897 |
1 |
|
Ordinary shares of 0.2p each issued as consideration in the purchase of subsidiaries |
3,240,644 |
6 |
|
At 30 April 2020 |
82,076,332 |
164 |
25. Share premium
|
|
£'000 |
|
|
|
|
As at 1 May 2018 |
- |
|
Premium arising on issue of equity shares |
34,327 |
|
Expenses of issue of equity shares |
(1,841) |
|
As at 30 April 2019 |
32,486 |
|
Premium arising on issue of equity shares |
34,475 |
|
Expenses of issue of equity shares |
(709) |
|
At 30 April 2020 |
66,252 |
|
|
|
26. Reserves
|
|
|
|
|
|
Merger reserve £'000 |
Retained earnings |
|
|
|
|
|
|
|
|
|
At 1 May 2018 |
|
|
|
|
(3,536) |
6,234 |
|
Profit for the period and total comprehensive income |
|
|
|
|
- |
4,001 |
|
Credit to equity for equity-settled share-based payments |
|
|
|
|
- |
356 |
|
Dividends (note 18) |
|
|
|
|
- |
(433) |
|
Balance at 30 April 2019 |
|
|
|
|
(3,536) |
10,158 |
|
IFRS 16 impact (note 37) |
|
|
|
|
- |
2,058 |
|
Profit for the period and total comprehensive income |
|
|
|
|
- |
1,820 |
|
Credit to equity for equity-settled share-based payments |
|
|
|
|
- |
789 |
|
Dividends (note 18) |
|
|
|
|
- |
(1,755) |
|
Balance at 30 April 2020 |
|
|
|
|
(3,536) |
13,070 |
The merger reserve of £3,536,000 arose on the share for share exchange by Knights 1759 Limited and Knights Professional Services Limited. The reserve is the difference between the nominal value of Knights 1759 Limited share capital and amounts paid to the shareholders as part of the Group reorganisation in October 2016 and the share capital, share premium value and capital redemption of the shares acquired in Knights Professional Services Limited.
Retained Earnings represents cumulative profits and losses of the Group net of distributions to members.
27. Borrowings
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Secured borrowings at amortised cost: |
|
|
|
Bank loans |
28,650 |
19,000 |
|
Total borrowings |
28,650 |
19,000 |
|
Amount due for settlement within 12 months |
- |
- |
|
Amount due for settlement after 12 months |
28,650 |
19,000 |
All of the Group's borrowings are denominated in sterling.
The Group has a credit facility of £40,000,000 in total (2019: £27,000,000) compromising term debt and revolving credit facilities. The previous facility that was due to expire on 25 June 2023 was increased in the year to £40,000,000. The facility remains available until 25 June 2023.
The new facility is a revolving credit facility and is renewed monthly and is due for final repayment on 25 June 2023. The facility is secured by a fixed and floating charge over the Group's assets. The facility carries an interest margin above LIBOR of between 1.65% and 2.45% depending on the leverage level. A commitment fee of one third of the applicable margin is payable on the undrawn amounts.
28. Deferred consideration
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Non-current liabilities |
|
|
|
Deferred consideration |
127 |
1,611 |
|
|
127 |
1,611 |
|
Current liabilities |
|
|
|
Deferred consideration |
2,723 |
1,628 |
|
|
2,723 |
1,628 |
Deferred consideration as at 30 April 2020 relates to the acquisitions of Turner Parkinson LLP, Fraser Brown, ASB Law LLP and Shulmans LLP and is not contingent.
In addition the Group has contingent consideration accrued and included within trade and other payables relating to acquisitions. This is contingent based upon continued employment and is being accrued on a monthly basis in the Statement of Comprehensive Income in accordance with the terms of the agreement. It is expected that employment will continue for the terms of the agreement and, therefore, the contingent consideration will be payable in full.
29. Deferred tax
The following are the major deferred tax liabilities and (assets) recognised by the Group and movements thereon during the current and prior reporting period.
|
|
Accelerated capital allowances £'000 |
Intangible assets £'000 |
Share-based payments £'000 |
IFRS 16 £'000 |
Total £'000 |
|
As at 1 May 2018 |
109 |
1,275 |
- |
- |
1,384 |
|
Acquisitions of subsidiaries |
- |
2,190 |
- |
- |
2,190 |
|
Charge/(credit) for the year |
92 |
(118) |
(60) |
- |
(86) |
|
As at 30 April 2019 |
201 |
3,347 |
(60) |
- |
3,488 |
|
IFRS 16 impact |
- |
- |
- |
(299) |
(299) |
|
Charge/(credit) for the prior year |
(87) |
(5) |
9 |
- |
(83) |
|
Acquisitions of subsidiaries |
- |
1,897 |
- |
- |
1,897 |
|
Charge/(credit) for the year |
282 |
308 |
(156) |
(8) |
426 |
|
As at 30 April 2020 |
396 |
5,547 |
(207) |
(307) |
5,429 |
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances after offset for financial reporting purposes:
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Deferred tax assets |
(514) |
(60) |
|
Deferred tax liabilities |
5,943 |
3,548 |
|
|
5,429 |
3,488 |
30. Trade and other payables
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Trade payables |
3,033 |
1,442 |
|
Other taxation and social security |
6,180 |
3,511 |
|
Other payables |
2,817 |
1,868 |
|
Accruals |
7,989 |
5,284 |
|
|
20,019 |
12,105 |
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 25 days (2019: 26 days). No interest is charged on the trade payables.
The directors consider that the carrying amount of trade payables approximates to their fair value.
31. Provisions
|
|
|
Dilapidation provision £'000 |
Onerous contract provision £'000 |
|
Total £'000 |
|
As at 30 April 2018 |
|
161 |
- |
- |
161 |
|
1 May 2019 - Transferred in from accruals |
|
- |
- |
|
284 |
|
Acquisitions of subsidiaries |
|
231 |
272 |
- |
503 |
|
Additional provision in the year |
|
81 |
202 |
284 |
567 |
|
Utilisation of provision |
|
- |
(39) |
(29) |
(68) |
|
As at 30 April 2019 |
|
473 |
435 |
539 |
1,447 |
|
IFRS 16 reallocation |
|
- |
(435) |
- |
(435) |
|
Acquisitions of subsidiaries |
|
652 |
- |
264 |
916 |
|
Additional provision in the year |
|
546 |
- |
90 |
636 |
|
Utilisation of provision |
|
(123) |
- |
(295) |
(418) |
|
As at 30 April 2020 |
|
1,548 |
- |
598 |
2,146 |
The dilapidations provision relates to the potential rectification of leasehold sites upon expiration of the leases. This has been based on a surveyor's valuation of the schedule of works included in the lease, or in absence of a surveyor's estimate, is based on the directors' estimate of potential liabilities.
The onerous contract provision relates to vacant offices where the Group is the lessee. The Group is actively marketing these leases for reassignment. The provision represents the directors' estimate of the future lease payments to be paid by the Group prior to reassignment of the leases. The onerous contracts provision also includes contracts acquired via acquisition that are non-cancellable. The provision represents the remaining payments under the terms of the lease. Future lease payments are offset against the provision. This provision has been transferred to right-of-use assets in accordance with IFRS 16 during the year.
The professional indemnity provision (transferred from accrued expenses on 1 May 2018), relates to a number of disputes in the ordinary course of business for all claims where costs are likely to be incurred and represents the cost of defending and concluding claims and any excess that may become payable. The Group carries professional indemnity insurance and no separate disclosure is made of the cost of claims covered by insurance as to do so could seriously prejudice the position of the Group.
32. Financial instruments
Categories of financial instruments
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Financial assets |
|
|
|
Amortised cost |
|
|
|
Contract assets |
21,507 |
11,112 |
|
Trade and other receivables (excluding prepayments) |
23,425 |
11,706 |
|
Cash and cash equivalents |
12,741 |
4,904 |
|
Financial liabilities |
|
|
|
Amortised cost |
|
|
|
Borrowings |
28,650 |
19,000 |
|
Deferred consideration |
2,850 |
3,239 |
|
Trade and other payables |
12,872 |
8,448 |
|
Fair value Trade and other payables |
|
146 |
|
|
|
|
Financial risk management objectives
The Group's finance function monitors and manages the financial risks relating to the operations of the Group. These risks include market risk (interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.
Market risk
The Group's activities expose it primarily to the financial risks of changes in interest rates (see below). Market risk exposures are measured using sensitivity analysis.
There has been no change to the Group's exposure to market risks or the manner in which these risks are managed and measured.
Interest rate risk management
The Group is exposed to interest rate risk because the Group borrows funds at floating interest rates. The risk is managed by the Group by keeping the level of borrowings at a manageable level.
Interest rate sensitivity analysis
The sensitivity analysis below has been determined based on the exposure to interest rates for financial instruments at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year.
If interest rates had been 0.5% higher/lower and all other variables were held constant, the Group's profit for the year ended 30 April 2020 would decrease/increase by £143,000 (2019: decrease/increase by £95,000). This is attributable to the Group's exposure to interest rates on its variable rate borrowings.
The Group's sensitivity to interest rates has increased during the current year mainly due to the increase in the borrowings of the Group.
Credit risk management
Note 23 details the Group's maximum exposure to credit risk and the measurement bases used to determine expected credit losses.
The risk of bad debts is mitigated by the Group having a policy of performing credit checks or receiving payments on account for new clients when practical and ensuring that the Group's exposure to any individual client is tightly controlled, through credit control policies and procedures.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the financial charges on its debt instruments and repayments of principal. There is a risk that the Group will encounter difficulty in meetings its financial obligations as they fall due or not meet its required covenants. The Group manages this risk and its cash flow requirements through detailed annual and monthly cash flow forecasts. These forecasts are reviewed regularly to ensure that the Group has sufficient working capital to enable it to meet all of its short term and long-term cash flow needs.
The tables below analyse the Group's financial liabilities into relevant maturity groupings based on their contractual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows.
Contractual maturities of financial liabilities
|
30 April 2020 |
< 1 year £'000 |
1-2 years £'000 |
2-5 years £'000 |
Total £'000 |
|
Borrowings |
- |
- |
28,650 |
28,650 |
|
Deferred consideration |
2,723 |
127 |
- |
2,850 |
|
Trade and other payables |
13,839 |
- |
- |
13,839 |
|
30 April 2019 |
< 1 year £'000 |
1-2 years £'000 |
2-5 years |
Total |
|
Borrowings |
- |
- |
19,000 |
19,000 |
|
Deferred consideration |
1,628 |
1,611 |
- |
3,239 |
|
Trade and other payables |
8,594 |
- |
- |
8,594 |
The Group has met its covenant tests during the year.
Capital management
The capital structure of the Group consists of borrowings (as disclosed in note 27) and equity of the Group (comprising issued capital, reserves, and retained earnings as disclosed in the Statement of Changes in Equity).
In managing its capital, the Group's primary objective is to provide a return for its equity shareholders through capital growth and future dividend income. The Group seeks to maintain a gearing ratio that balances risk and returns at an acceptable level and also to maintain a sufficient funding base to enable the Group to meet its working capital and strategic investment needs and objectives.
Gearing ratio
The gearing ratio at the year end is as follows:
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
Borrowings (note 27) |
28,650 |
19,000 |
|
Cash and cash equivalents |
(12,741) |
(4,904) |
|
Net debt |
15,909 |
14,096 |
|
Equity |
75,950 |
39,255 |
|
|
% |
% |
|
Net debt to equity ratio |
21 |
36 |
Significant accounting policies
Details of the significant accounting policies and methods adopted (including the criteria for recognition, the basis of measurement and the bases for recognition of income and expenses) for each class of financial asset, financial liability and equity instrument are disclosed in note 2.
33. Capital commitments
As at 30 April 2020 there is a capital commitment of £82,000 (2019: £425,000) in relation to an ongoing office refurbishment.
34. Reconciliation of profit to net cash generated from operations
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Profit before taxation |
4,058 |
5,241 |
|
Adjustments for: |
|
|
|
Amortisation |
1,501 |
757 |
|
Depreciation - property, plant and equipment |
858 |
702 |
|
Depreciation - right-of-use assets (net of £86,000 included in non underlying costs) |
1,909 |
- |
|
Loss on disposal of equipment (net of £97,000 included in non underlying costs) |
8 |
14 |
|
Contingent consideration not payable |
- |
(30) |
|
Contingent consideration expense |
2,996 |
233 |
|
Non-underlying operating costs |
4,581 |
1,314 |
|
Share based payments |
861 |
356 |
|
Interest income |
(399) |
(162) |
|
Interest expense |
1,530 |
2,776 |
|
Operating cash flows before movements in working capital |
17,903 |
11,201 |
|
Increase in contract assets |
(2,103) |
(1,788) |
|
Increase in trade and other receivables |
(1,186) |
(1,171) |
|
(Decrease)/Increase in provisions |
(183) |
782 |
|
Increase in contract liabilities |
57 |
18 |
|
(Decrease)/increase in trade and other payables |
(697) |
2,664 |
|
Cash generated from operations |
13,791 |
11,706 |
35. Changes in liabilities arising from financing activities
The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's Consolidated Statement of Cash Flows as cash flows from financing activities.
|
|
Borrowings £'000 |
|
As at 1 May 2019 |
19,000 |
|
Repayment of borrowings |
(35,150) |
|
Proceeds of new borrowings |
44,800 |
|
As at 30 April 2020 |
28,650 |
36. Alternative performance measures
This Annual Report contains both statutory measures and alternative performance measures. In management's view the underlying performance of the business provides a more meaningful comparison of how the Group's business is managed and measured on a day-to-day basis.
The Group's alternative performance measures and key performance indicators are aligned to the Group's strategy and together are used to measure the performance of the business.
Alternative performance measures are non-GAAP (Generally Accepted Accounting Practice) measures and provide supplementary information to assist with the understanding of the Group's financial results and with the evaluation of operating performance for all the periods presented. Alternative performance measures, however, are not a measure of financial performance under International Financial Reporting Standards ('IFRS') as adopted by the European Union and should not be considered as a substitute for measures determined in accordance with IFRS. As the Group's alternative performance measures are not defined terms under IFRS they may therefore not be comparable with similarly titled measures reported by other companies.
Reconciliations of alternative performance measures to the most directly comparable measures reported in accordance with IFRS are provided below.
a) Adjusted EBITDA
Adjusted EBITDA is presented as an alternative performance measure to show the underlying operating performance of the Group excluding the effects of depreciation, amortisation and non-underlying items.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Operating profit |
5,588 |
8,017 |
|
Depreciation and amortisation charges |
4,276 |
1,473 |
|
Non-underlying costs (note 13) |
8,090 |
1,847 |
|
Adjusted EBITDA |
17,954 |
11,337 |
b) Adjusted profit before tax (PBT)
Adjusted PBT is presented as an alternative performance measure to show the underlying performance of the Group excluding the effects of amortisation of intangible assets and non-underlying items.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Profit before tax |
4,058 |
5,241 |
|
Amortisation (adjusted for amortisation on computer software) |
1,427 |
693 |
|
Non-underlying costs (note 13) |
8,090 |
1,847 |
|
Non-recurring finance costs |
41 |
2,038 |
|
Adjusted profit before tax |
13,616 |
9,819 |
Non-recurring finance costs relate to exit fees and arrangement fees expensed due to the refinancing of the Group during the year and accrued interest on deferred consideration.
c) Adjusted profit after tax (PAT) and adjusted earnings per share (EPS)
Adjusted PAT and EPS are presented as alternative performance measures to show the underlying performance of the Group excluding the effects of amortisation of intangible assets, share-based payments and non-underlying items.
|
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
|
|
|
|
|
Profit after tax |
|
1,820 |
4,001 |
|
Amortisation (adjusted for amortisation on computer software) |
|
1,427 |
693 |
|
Non-underlying operating costs |
|
8,090 |
1,847 |
|
Non-recurring finance costs |
|
41 |
2,038 |
|
Tax in respect of the above |
|
(672) |
(438) |
|
Adjusted profit after tax |
|
10,706 |
8,141 |
|
Adjusted earnings per share |
|
Pence |
Pence |
|
Basic adjusted earnings per share |
|
14.33 |
11.88 |
|
Diluted adjusted earnings per share |
|
14.20 |
11.83 |
Tax has been calculated at the corporation tax rate 19% (2019: 19%) and deferred tax rate of 19% (2019: 17%)
d) Free cash flow and cash conversion %
Free cash flow measures the Group's underlying cash generation. Cash conversion % measures the Group's conversion of its adjusted PAT into free cash flows. Free cash flow is calculated as the total of net cash from operating activities after adjusting for tax paid and the impact of IFRS 16 (to be comparable with the treatment of lease costs in the prior year). Cash conversion % is calculated by dividing free cash flow by adjusted profit after tax, which is reconciled to profit after tax above.
Previously free cash flow was calculated as the total of net cash from operating activities, interest paid and net cash flows on capital expenditure after excluding cash flows in respect of non-underlying costs. However the Group considers that the revised method is a more accurate reflection of the operating cash flow of the business.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Cash generated from operations (note 34) |
13,791 |
11,706 |
|
Tax paid |
(2,907) |
(1,076) |
|
Total cash outflow for IFRS16 leases |
(2,366) |
- |
|
Free cashflow |
8,518 |
10,630 |
|
Adjusted profit after tax |
10,706 |
8,141 |
|
Cash conversion (%) |
80% |
131% |
|
Previously reported cash conversion |
- |
115% |
37. Lease liabilities - IFRS 16 Leases
The weighted average incremental borrowing rate applied to lease liabilities recognised at 1 May 2019 is 3.60%. Incremental borrowing rates applied to individual leases ranged between 2.40% and 6.49%.
During transition prepayments of £185,000 were released against the right-of-use asset. Rent free accruals of £1,759,000 and deferred tax of £299,000 were adjusted against opening reserves.
The table below sets out the impact on the Consolidated Statement of Financial Position as at 30 April 2020 and 1 May 2019:
|
|
30 April 2020 £'000 |
1 May 2019 £'000 |
|
Right-of-use assets |
|
|
|
Property |
22,649 |
19,267 |
|
Equipment |
1,100 |
140 |
|
|
23,749 |
19,407 |
|
Lease liability |
|
|
|
> 1 year |
21,078 |
17,894 |
|
< 1 year |
2,766 |
1,272 |
|
|
23,844 |
19,166 |
The table below shows the impact on the Consolidated Statement of Comprehensive Income for 12 months to 30 April 2020 compared to reporting under IAS 17:
|
|
12 months ended 30 April 2020 £'000 |
|
Profit before tax under IFRS 16 |
4,058 |
|
Depreciation on right-of-use assets |
1,995 |
|
Finance costs |
812 |
|
|
6,865 |
|
Rental costs under IAS 17 |
(2,265) |
|
Profit before tax under IAS 17 |
4,600 |
Whilst the cash flows of the Group have not been affected by the adoption of IFRS 16, during the period ended 30 April 2020 cash outflows from financing activities presented in the Consolidated Statement of Cash Flows increased by £1,576,000 for cash payments of the principal portion and £790,000 for cash payments of the interest portion of leases recognised within lease liabilities under IFRS 16. Cash generated from operations reflects the corresponding reduction of £2,366,000 of payments for leases previously classified as operating leases under IAS 17.
Differences between the operating lease commitments disclosed at 30 April 2019 under IAS 17 discounted at the incremental borrowing rate at 1 May 2019 and lease liabilities recognised at 1 May 2019 are shown below:
|
|
|
|
Total |
|
|
£'000 |
£'000 |
£'000 |
|
Operating lease commitments at 30 April 2019 |
24,893 |
1,347 |
26,240 |
|
Impact of discounting |
(6,573) |
(8) |
(6,581) |
|
Leases not yet commenced at 1 May 2019 |
- |
(1,108) |
(1,108) |
|
Short-term leases recognised as an expense |
(4) |
(68) |
(72) |
|
Long-term leases expiring before 30 April 2020 |
(116) |
(37) |
(153) |
|
Impact of rent increases |
834 |
- |
834 |
|
Other reconciling items (net) |
- |
6 |
6 |
|
Lease liability opening balance 1 May 2019 |
19,034 |
132 |
19,166 |
The table below shows lease liabilities maturity analysis - contractual undiscounted cash flows at 30 April 2020.
|
|
Property |
Equipment |
Total |
|
|
£'000 |
£'000 |
£'000 |
|
Less than one year |
3,424 |
565 |
3,989 |
|
One to five years |
11,015 |
850 |
11,865 |
|
More than five years |
15,099 |
- |
15,099 |
|
|
29,538 |
1,415 |
30,953 |
The table below shows amounts recognised in the Statement of Comprehensive Income for short term and low value leases as at 30 April 2020:
|
|
Property £'000 |
Equipment £'000 |
Total £'000 |
|
Expenses relating to short - term leases |
143 |
18 |
161 |
|
Expenses relating to leases of low-value assets, excluding short-term leases of low-value assets |
|
|
- |
|
|
143 |
18 |
161 |
The total minimum lease payments at 30 April 2019 under non-cancellable operating lease rentals were:
|
|
30 April 2019 £'000 |
|
Within one year |
2,302 |
|
In the second to fifth year inclusive |
9,408 |
|
After five years |
14,530 |
|
|
26,240 |
Operating lease payments represent rentals payable by the Group for office properties, motor vehicles and office equipment.
38. Defined benefit pension schemes
The Stonehams Pension Scheme
The Group operates a defined benefit pension arrangement, the Stonehams Pension Scheme (the "Scheme"). The Scheme provides benefits based on salary and length of service on retirement, leaving service, or death. The following disclosures exclude any allowance for any other pension schemes operated by the Group.
The Scheme was acquired as part of the acquisition of ASB Law where contracts were exchanged on 5 March 2020. Therefore the disclosures below represent the period of ownership from 5 March 2020 to 30 April 2020. The scheme is closed and provides benefits for 43 legacy employees (now pensioners and deferred members).
The Scheme is subject to the Statutory Funding Objective under the Pensions Act 2004. A valuation of the Scheme is carried out at least once every three years to determine whether the Statutory Funding Objective is met. As part of the process the Group must agree with the Trustees of the Scheme the contributions to be paid to address any shortfall against the Statutory Funding Objective.
The most recent comprehensive actuarial valuation of the Scheme was carried out as at 31 December 2018. The results of that valuation were updated to 30 April 2020 allowing for cashflows in and out of the Scheme and changes to assumptions over the period.
From January 2020 the employer started to make annual contributions of £35,000 per annum towards administration expenses. Administration expenses from 1 November 2017 to 31 December 2019 have been met directly from the assets of the Scheme. The Group will separately meet the cost of the PPF levy.
The Scheme typically exposes the Group to actuarial risks such as: investment risk, interest rate risk and longevity risk.
|
Investment risk |
The present value of the defined benefit plan liability is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan assets is below this rate, it will create a plan deficit. Currently assets are invested in very low risk funds, which will reduce volatility. The investment approach is reviewed every three years as part of the valuation process. |
|
Interest risk |
There is some hedging in the asset portfolio, but at a low level. A decrease in the bond interest rate will increase the plan liability but this will be partially offset by an increase in the return on the plan's debt investments. |
|
Longevity risk |
The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan's liability. The average duration of the Schemes obligations is 16 years. |
Explanation of amounts in the financial statements
Actuarial assumptions
Principal actuarial assumptions
|
|
30 April 2020 % |
|
Discount rate |
1.58 |
|
Retail Prices Index ("RPI") Inflation |
2.85 |
|
Consumer Price Index ("CPI") Inflation |
1.95 |
|
Pension increase (LPI 5%) |
2.80 |
|
Pension increase (LPI 2.5%) |
2.03 |
|
Post retirement mortality |
90%/100% (m/f) S2PA CMI_2017 projections (with standard smoothing parameter of 7.5) using a long-term improvement rate of 1.0% pa |
|
Commutation |
80% of members are assumed to take the maximum tax free cash possible using current commutation factors |
|
|
|
|
Life expectancy at age 65 of male aged 45 |
23.6 |
|
Life expectancy at age 65 of male aged 65 |
22.6 |
|
Life expectancy at age 65 of female aged 45 |
25.2 |
|
Life expectancy at age 65 of female aged 65 |
24.1 |
|
|
|
|
The average duration of the Schemes obligations is 16 years. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current asset split is as follows |
|
|
|
Asset allocation at 30 April 2020
|
|
|
|
|
Equities and growth assets |
20% |
|
Bonds, LDI and cash |
80% |
|
|
|
|
|
|
|
|
Value as at 30 April 2020
|
|
Fair value of assets |
3,384 |
|
Present value of funded obligations |
(2,732) |
|
Surplus in scheme |
652 |
|
Deferred tax |
- |
|
Net defined benefit surplus after deferred tax |
652 |
|
|
|
|
|
£'000 |
|
The fair value of the assets at 30 April 2020 can be analysed as follows: |
|
|
Low risk investment funds |
692 |
|
Credit Investment funds |
1,434 |
|
Matching funds |
998 |
|
Cash |
260 |
|
Fair value of assets |
3,384 |
|
|
|
|
|
|
|
|
30 April 2020 |
|
Current service costs |
- |
|
Past service costs |
- |
|
Administration costs |
2 |
|
Interest on liabilities |
1 |
|
Interest on assets |
(3) |
|
Total charge to the Statement of Comprehensive Income |
- |
|
|
|
|
Remeasurements over the period since acquisition
|
|
|
|
30 April 2020 |
|
Loss on assets in excess of interest |
(145) |
|
Total remeasurements |
(145) |
|
|
|
|
|
|
|
The change in value of assets
|
|
|
|
30 April 2020 |
|
Fair value of assets as at acquisition |
3,534 |
|
Interest on assets |
8 |
|
Group contributions |
- |
|
Benefits paid |
(11) |
|
Administration costs |
(2) |
|
Loss on assets in excess of interest |
(145) |
|
Fair value of assets |
3,384 |
|
|
|
|
Actual return on assets |
(137) |
|
|
|
|
|
|
|
Change in value of liabilities |
|
|
|
30 April 2020 |
|
Value of liabilities at acquisition |
2,737 |
|
Interest cost |
6 |
|
Benefits paid |
(11) |
|
Value of liabilities |
2,732 |
|
|
|
|
|
|
|
Sensitivity of the value placed on the liabilities |
|
|
|
Approximate effect on liability
|
|
Discount rate |
|
|
Minus 0.50% |
208 |
|
Inflation |
|
|
Plus 0.50% |
161 |
|
Life Expectancy |
|
|
Plus 1.0 years |
123 |
|
|
|
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivity analysis above has been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
The With Profits Section of the Cheviot pension
Allocation of liabilities between employers
The With Profits Section was acquired as part of the acquisition of ASB Law where contracts were exchanged on 5 March 2020.
The Trustee has discretion under the contribution rule on how the cost of providing the benefits of the With Profits Section is allocated between employers. The contribution rule applies until the earlier of the discharge of the employer by the Trustee and the termination of the With Profits Section. The Trustee's current policy is not to discharge employers. Employers therefore remain liable under the contribution rule even if their last member dies or transfers out.
The Trustee has been considering how best to ensure all employers bear an appropriate share of the With Profits Section's obligations whilst ensuring fairness between employers and a practical and transparent methodology for the future.
As discussed at the Employers' Meeting on 5 July 2017, the Trustee has decided to fix the allocation between employers on the basis of the promised benefits just before the Section was re-classified in 2014 (the valuation as at 31 December 2013). The allocation to each employer will be expressed as a percentage of the total Scheme liabilities. The intention is to apply this percentage to any funding, buyout or IFRS deficit in the future to calculate any contribution that may be due or any accounting liability.
The estimated percentage in relation to Knights Professional Services Limited is 0.790%.
This approach enables each employer to calculate the extent of their obligation to the Section on the basis of the funding level at any time. Cheviot will publish funding updates on the website: quarterly, on the scheme funding basis, which includes an allowance for future investment returns; and annually, on an estimated buyout basis, which looks at the position should all benefits be secured with an external provider.
Estimated funding position as at 30 April 2020:
|
As at 30 April 2020 |
Scheme funding basis |
|
|
£'000 |
|
Total assets |
94,400 |
|
Total liabilities excluding expenses |
(97,200) |
|
Deficit |
(2,800) |
|
Funding level |
97% |
|
|
|
Allocation to the Group
The estimated share of the Scheme liabilities is 0.790%.
Over the year to 30 April 2020, the Section's funding position worsened from a small surplus to a small deficit.
|
|
30 April 2020 |
|
|
£'000 |
|
Estimated cost of providing benefits |
(768) |
|
Value of assets |
746 |
|
Resulting shortfall |
(22) |
|
Funding level |
97% |
The deficit has not been recognised as management consider this to be temporary and not material.
The Trustee continues to monitor the funding position.
The Trustee reserves the right to withdraw, replace or amend the policy for the allocation between employers in the future.
39. Related party transactions
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its other related parties are disclosed below.
KPV Propco Ltd is a Company controlled by Mr DA Beech, a person with significant influence over the Group and a member of key management personnel.
The Group leases a property from KPV Propco Ltd. During the year rents of £367,000 (2019: £343,000) were charged by KPV Propco Ltd to the Group.
During the year Knights Professional Services Limited charged KPV Propco Ltd for professional services totalling £98,000 (2019: £nil).
At 30 April 2020, there was an amount of £246,000 (2019: £229,000) owed to KPV Propco Ltd by the Group.
Remuneration of key management personnel
The remuneration of the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Short-term employee benefits and social security costs |
1,174 |
829 |
|
Pension costs |
23 |
14 |
|
Share-based payments |
181 |
106 |
|
|
1,378 |
949 |
Key management personnel includes board members and directors.
Transactions with directors
Dividends totalling £787,000 (2019: £202,000) were paid in the year in respect of ordinary shares held by the Company's directors.
Glossary of terms
Alternative Financial Performance Measure
This document contains certain financial measures that are not defined or separately recognised under IFRS. These measures are used by the board and other users of the accounts to evaluate the Group's underlying trading performance excluding the impact of any non- recurring items and items that do not reflect the underlying day to day trading of the Group. These measures are not audited and are not standard measures of financial performance under IFRS. There are no generally accepted principles governing the calculation of these measures and the criteria upon which these measures are based can vary from company to company. Accordingly these measures should be viewed as supplemental to, not as a substitute for, the financial measures calculated under IFRS.
Underlying EBITDA
Adjusted EBITDA is presented as an alternative performance measure to show the underlying operating performance of the Group excluding the effects of depreciation, amortisation, share-based payments and non-underlying items.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Operating profit |
5,588 |
8,017 |
|
Depreciation and amortisation charges |
4,276 |
1,473 |
|
Non-underlying costs |
8,090 |
1,847 |
|
Underlying EBITDA |
17,954 |
11,337 |
Underlying profit before tax (PBT)
Adjusted PBT is presented as an alternative performance measure to show the underlying performance of the Group excluding the effects of amortisation of intangible assets, share-based payments and non-underlying items.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Profit before tax |
4,058 |
5,241 |
|
Amortisation |
1,427 |
693 |
|
Non-underlying costs |
8,090 |
1,847 |
|
Non-recurring finance costs |
- |
1,924 |
|
Effective interest on deferred consideration |
41 |
114 |
|
Underlying profit before tax |
13,616 |
9,819 |
Underlying profit after tax (PAT) and adjusted earnings per share (EPS)
Adjusted PAT and EPS are presented as alternative performance measures to show the underlying performance of the Group excluding the effects of amortisation of intangible assets, share-based payments and non-underlying items.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
|
|
|
|
Profit after tax |
1,820 |
4,001 |
|
Amortisation on acquisition related intangibles goodwill |
1,427 |
693 |
|
Non-underlying operating costs |
8,090 |
1,847 |
|
Non-recurring finance costs |
- |
1,924 |
|
Effective interest on deferred consideration |
41 |
114 |
|
Tax in respect of the above |
(672) |
(438) |
|
Underlying profit after tax |
10,706 |
8,141 |
|
Adjusted earnings per share |
Pence |
Pence |
|
Basic adjusted earnings per share |
14.33 |
11.88 |
|
Diluted adjusted earnings per share |
14.20 |
11.83 |
Free cash flow and cash conversion %
Free cash flow measures the Group's underlying cash generation. Cash conversion % measures the Group's conversion of its adjusted PAT into free cash flows. Free cash flow is calculated as the total of net cash from operating activities, tax paid and cashflows outflows for IFRS 16 leases (to ensure comparability with 2019). Cash conversion % is calculated by dividing free cash flow by adjusted profit after tax, which is reconciled to profit after tax above.
|
|
Year ended 30 April 2020 £'000 |
Year ended 30 April 2019 £'000 |
|
Cash generated from operations (note 34) |
13,791 |
11,706 |
|
Tax paid |
(2,907) |
(1,076) |
|
Total cash outflow for IFRS 16 lease |
(2,366) |
- |
|
Free cash flow |
8,518 |
10,630 |
|
Underlying profit after tax |
10,706 |
8,141 |
|
Cash conversion (%) |
80% |
131% |
Working Capital
Working capital is calculated as
|
|
30 April 2020 £'000 |
30 April 2019 £'000 |
|
|
|
|
|
Current assets |
|
|
|
Contract assets |
21,507 |
11,112 |
|
Trade and other receivables |
27,046 |
13,671 |
|
|
48,553 |
24,783 |
|
Current liabilities |
|
|
|
Trade and other payables |
20,019 |
12,105 |
|
Contract liabilities |
177 |
120 |
|
Corporation tax liability |
675 |
796 |
|
|
20,871 |
13,021 |
|
Net working capital |
27,682 |
11,762 |
Other definitions
Colleague / Talent retention / employee turnover
Churn is calculated based on the number of qualified fee earner who had been employed by the Group for more than one year. Churn is calculated taking the number of leavers in the above group over the financial year as a percentage of the average number of colleagues (as defined above) for the year. Retention is 100% less the churn rate.
Fee earner concentration
This is calculated showing taking the largest fees allocated to an individual fee earner as a percentage of the total turnover for the year and demonstrates the Groups reliance on the fee earning potential of an individual fee earner.
Client concentration
On an individual basis this is calculated as the percentage of total turnover for the financial year that arises from fees of the largest client
For the top 10 client concentration calculation this takes the fee income from the 10 largest clients for the year as a percentage of the total turnover for the year.
Client satisfaction
NPS: Net Promoter Score (NPS) measures the loyalty of a client to a company and can be used to gauge client satisfaction. NPS scores are measured with a single question survey and reported with a number from -100 to +100, the higher the score, the higher the client loyalty/satisfaction.
Colleague Satisfaction
Employee Net Promoter Score (ENPS) measures the loyalty of employees to a company and how likely they are to recommend their employer as a place to work, which can also be used to gauge employee satisfaction. ENPS scores are measured with a single question survey and reported with a number from -100 to +100, the higher the score the higher the employee loyalty.
Fee earners
When referring to the number of fee earners in the Group we include all individuals working in the Group on a mainly fee earning basis. This includes professionals (legal and non -legal) of all levels including paralegals, trainees and legal assistants.
When referring to the number of fee earners in the business this will refer to the absolute number of individuals working in the Group.
When using the number of fee earners to calculate the average fees or profit per fee earner or the ratio of fee earners to support staff these calculations are based on the number of full time equivalent (FTE) individuals to reflect that a number of individuals choose to work on a part time basis.
Non fee earners / support staff
This includes all employees that are not fee earning.
Recurring revenue
This is calculated based on the amount if revenue in a year that reoccurs in the following year from the same clients.
Lock up
This is calculated as the combined debtor and WIP days as at a point in time.
Debtor days are calculated on a count back basis using the gross debtors at the period end and compared to the total fees raised over prior months.
WIP (work in progress) days are calculated based on the gross work in progress (excluding that relating to clinical negligence claims and calculating how many days billing this relates to based on average fees (again excluding clinical negligence fees) per month for the last 6 months.
TSR
Total shareholder return is calculated as :
|
Share price at 30 April 2020 |
£3.575 |
|
Share price at listing |
(£1.450) |
|
Dividend paid in period |
£0.024 |
|
Gain on shares in period |
£0.769 |
|
As a percentage of opening price |
27.2% |
Financial Performance Measure Comparable under IFRS 16
Underlying PBT is calculated before amortisation of acquired intangible assets; non-underlying costs relating to the placing, acquisitions and restructuring, contingent consideration payments, non-recurring finance costs, share based payments related to the IPO and acquisitions and is provided on an IFRS 16 basis in the prior period.
|
|
Reported IFRS 16 April 20 |
Comparable under IFRS 16 |
|
Underlying PBT |
£'000 |
£'000 |
|
|
|
|
|
Profit before tax - as reported |
4,058 |
5,241 |
|
IFRS 16 adjustments (see finance review) |
- |
(392) |
|
IFRS 16 adjusted profit before tax |
4,058 |
4,849 |
|
Amortisation on acquired intangibles |
1,427 |
693 |
|
Non underlying operating costs |
8,090 |
1,847 |
|
Non underlying finance costs |
41 |
2,038 |
|
Underlying profit before tax |
13,616 |
9,427 |
Underlying PAT is calculated as above after taking account of the tax charge and is provided on an IFRS 16 basis in the prior period.
Underlying EPS is calculated from profit after tax by adding back amortisation of acquired intangible assets, non-underlying costs relating to the placing, acquisitions and restructuring, contingent consideration payments, non-recurring finance costs and share-based payment charges related to the IPO and acquisitions and the tax in respect of these costs and it is provided on an IFRS 16 basis in the prior period.
|
|
Reported IFRS 16 April 20 |
Comparable under IFRS 16 |
|
Underlying PAT |
£'000 |
£'000 |
|
|
|
|
|
Profit after tax - as reported |
1,820 |
4,001 |
|
IFRS 16 adjustments (see finance review) |
- |
(392) |
|
IFRS 16 adjusted profit before tax |
1,820 |
3,609 |
|
Amortisation on acquired intangibles |
1,427 |
693 |
|
Non underlying operating costs |
8,090 |
1,847 |
|
Non underlying finance costs |
41 |
2,038 |
|
Tax in respect of above |
(672) |
(438) |
|
Underlying profit after tax |
10,706 |
7,749 |
|
Basic EPS |
2.44 |
5.27 |
|
Underlying EPS |
14.33 |
11.31 |
|
Diluted EPS |
14.20 |
11.26 |
Underlying EBITDA is calculated as reported operating profit after adjusting for the impact of the reclassification of leases costs under IFRS 16 and is provided on an IFRS 16 basis in the prior period.
|
|
Reported IFRS 16 April 20 |
Comparable under IFRS 16 |
|
Underlying EBITDA |
£'000 |
£'000 |
|
|
|
|
|
Operating profit - as reported |
5,588 |
8,017 |
|
IFRS 16 adjustments (see finance review) |
- |
1,603 |
|
IFRS 16 adjusted operating profit |
5,588 |
9,620 |
|
Depreciation and amortisation charges |
4,276 |
1,473 |
|
Non-underlying costs |
8,090 |
1,847 |
|
Underlying EBITDA |
17,954 |
12,940 |
Cash conversion is calculated as the total of net cash from operations, tax paid and payments of lease interest and lease finance liabilities under IFRS 16 for periods from 1 May 2019, divided by the underlying profit after tax, which is calculated from profit after tax by adding back amortisation on acquired intangible assets, non-underlying costs and finance costs, contingent consideration payments, share-based payment charges related to the IPO and acquisitions and the tax in respect of these costs.
|
|
Reported IFRS 16 April 20 |
Comparable under IFRS 16 |
|
Cash flow conversion |
£'000 |
£'000 |
|
|
|
|
|
Free cash flow - as reported |
8,518 |
10,630 |
|
Underlying profit after tax |
10,706 |
7,749 |
|
|
80% |
137% |
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