Summary of events for the six months to 30 September 2015 for Octagonal PLC LON:OCT
· New Board appointed;
· Acquisition of outstanding stake in Global Investment Strategies UK Limited (“GIS”). Octagonal becomes a trading Group in the financial services sector;
· Capital re-organisation;
· £1.7m raised via a placing of 85,000,000 shares at 2p; and
· Profit before tax of £139,000 compared with a loss for the year to 31 March 2015 in Octagonal (pre-acquisition) of £1,128,000.
“Octagonal has undergone a dramatic change during the last 6 months. The Company acquired all the remaining issued shares in GIS by way of a reverse takeover on 30 June 2015 and in parallel underwent a capital reorganisation and raised £1.7m by way of a share placement.
Such transactions are complex, time consuming and testing. Despite this, GIS’s business continued to perform strongly gaining new clients, resulting in an increase in trade volumes of c.35% on last year, a 25% increase in revenues and gross margin being maintained above 60%. I thank John Gunn, his senior management and the entire team for their tireless work during this process and their continued focus on the business, resulting in this strong first half performance.
In addition, there are a number of ongoing initiatives aimed at reducing operating costs and developing additional revenue streams through ancillary services that will drive further revenue and profit growth.
Business Overview
The Company, through its subsidiary GIS, provides global settlement and safe custody services to investors, principally smaller institutions, family offices and high net worth individuals, along with other ancillary services. The business currently derives 80% of its revenues from settlement and safe custody services. It is growing, profitable and cash generative. The platform offers considerable scalability with high operational leverage that should drive up operating margins.
Whilst GIS’s business is not unique, it aims to provide a low risk, low cost service where revenue growth is driven by growth in the number of clients and trading volumes. The business differentiates itself through the strong relationships it has established with customers and service providers (banks, settlement custodians and brokerages) and a fixed fee per transaction model.
Historically, GIS has successfully expanded its base of clients and counterparty banks and has continued to do so through this period. This is driving the volume of transactions coupled with GIS’s track record of profitable growth and cash generation.
Trading results
This half year’s results reflect the transition that the Group has undergone. Since completing the acquisition of GIS on 30 June 2015, the business has continued its strong trading performance and market conditions for the period remained supportive with high trading volumes. Aggregate trade volumes exceeded 47,800 for the 6 months to 30 September 2015, an increase of 34.5% on 2014, with June setting a monthly record number of transactions for the business at over 12,000 and July was another strong month with a 66% increase compared to the same month in 2014.
The revenue for the six months to 30 September 2015 from continuing operations was £1.9 million (H1 FY15: £1.5 million), a 25% increase on a like for like basis. The adjusted operating profit before exceptional items amounted to £0.4 million compared with an operating profit of £0.2 million in the same period last year. Gross profit margins remain strong at 62% (H1 FY15: 63%) with operating profit margins significantly increasing to 36% (H1 FY15: 24%).
Net Assets amounted to £4.9 million (H1 FY15: £2.8m) and Cash and Bank was £1.3m (H1 FY15: £0.3m).
Exceptional items
Exceptional items amounted to £0.47million (H1 FY15: Nil). This relates to the fees associated with the reverse takeover and subsequent admission to trading on AIM.
Business Initiatives
The business is currently reviewing some cost reduction measures aimed at its direct settlement costs. This should have an immediate and positive impact on gross profit that would fall directly to the bottom line.
In addition, we are seeking to increase revenues through the provision of adjacent execution-only services to existing clients in addition to the current settlement and custody services. Coupled with this is the implementation plans to develop and grow the nascent Asset Management and Investment Advisory Services business. The immediate impact on revenues and profits of these initiatives will be limited however. If successful, these could have meaningful impact in the 2017 financial year.
After many months of preparation and testing, the new Altimis cloud based settlement and client reporting IT system will go live very shortly, being deployed into the business during December and early January. This system is the successor to Flagship (GIS’s current IT system) and is a fully automated settlement and custody and client reporting system that provides significantly improved client reporting and experience. This fully automated system should enable cost savings and provide a fully scalable platform for future growth.
Board Appointment
On 11 November, post period end, Samantha Esqulant was appointed Chief Operating Officer of the Company and joined the board. Samantha has been with GIS for more than two years, has a wealth of experience in settlement operations and risk management and 16 years’ experience with large and small financial services organisations including Bank of New York Mellon, LCF Rothschild and Barclays Capital. I welcome Samantha to the board and look forward to her continued contribution at a Company and board level.
Dividend
The Board remains committed to a progressive dividend policy. Whilst payment of a dividend remains subject to sufficient distributable reserves being available, this policy will seek to target an annual dividend of approximately 50% of Company’s free cash flow.
Prospects
The business has continued to see growth in both revenues and new client generation over this period. Octagonal remains focused on growing the core settlement and safe custody business organically and diversifying only into new areas that are earnings’ enhancing.
The continued focus of the core business will be on organic development, improving relationships with both clients and counterparties and seeking to grow this base. The business has reached a point where it is scalable and provides a suitable platform to expand the number of clients and the number of services offered, without the need for significant new capital. Improvements have been made in operating systems, reporting capabilities and automation. I expect to see continued growth in both revenues and new client generation during the second half of the year.
In addition, the Company will seek to utilise its various FCA permissions to grow revenue; a focus will be targeting growth in the nascent Asset Management and Investment Advisory Services business. Plans are being implemented to increase Assets under Advisory Management and I’m hopefully of being able to report some positive news during the second half of the year.
The business has had a strong first half performance and there are a number of ongoing initiatives aimed at increasing clients and operating profits. The prospects for the second half remain very positive and the board is confident of achieving market expectations for the full year. ”
Grant Roberts Chairman
