PayPoint PlcPreliminary ResultsYear ended 31 March 2021
Transformative year for the PayPoint Group with significant step change in strategic delivery
KEY HEADLINES
Nick Wiles, Chief Executive of PayPoint plc, said:
“This has been an exceptional year for PayPoint in which we have delivered a step change in our strategy while responding to the impact of Covid-19 on the business, our clients, retailer partners and their customers. This has required huge commitment and adaptability from everyone in the business to respond to these challenging circumstances and I would like to thank the team for their hard work throughout the year in supporting our clients, retailer partners and the communities they serve.
Against the background of delivering a solid financial performance for the year, we have been focused on delivering a step change in our strategic delivery through making the necessary business acquisitions and investments to strengthen our capabilities, broaden our retailer proposition, improve engagement and service quality for our clients and retailers and identify new areas of growth in our core UK market. We have made positive progress in this transformation of the business with more to achieve in the year ahead to strengthen our platform and maximise the opportunities available.
Further to our announcement on 30 September 2020, we continue to consider our response with respect to Ofgem’s provisional views set out in its Statement of Objections. In accordance with IFRS, the Board has made a provision of £12.5 million as a current best estimate for a resolution of this matter.
While early in the year, we are already seeing some encouraging signs of continuing renewed activity in a number of areas of our business, in particular in card processing and parcels. We are also encouraged by the early performance and rapid integration of i-movo and Handepay/Merchant Rentals into the PayPoint business and the new opportunities arising from the recently completed acquisition of RSM 2000. I am confident the steps we have taken during the financial year have strengthened the business and better positioned us for both recovery in our legacy businesses and growth in our developing markets. As a result, we are confident in the business delivering further progress in the year ahead as we take advantage of the accelerated growth opportunities across our key markets.”
FINANCIAL HIGHLIGHTS
OPERATIONAL HIGHLIGHTS
Strategic repositioning of the business for growth driven through acquisitions and investments in core UK market
Strong progress against strategic priorities, delivering growth and unlocking incremental opportunities
1. Embed PayPoint at the heart of convenience retail
2. PayPoint becomes the definitive parcel point solution
3. Sustain leadership in ‘pay-as-you-go’ and grow digital bill payments
Several MultiPay product portfolio enhancements launched in year, including Direct Debit, PayByLink (reducing collections payment friction and debt management support via personalised SMS reminders containing a payment link) and Event Streamer (enabling view of live cash transactions in real-time in MultiPay platform, alongside other digital payments channels)
4. Building a delivery focused organisation and culture
Responding to the structural changes in our legacy markets and the impact of Covid-19
Going into the 2020/21 financial year, management recognised the need to reposition the business in response to the impact of structural changes in our traditional legacy markets. In addition to the full year impact from the loss of the British Gas contract (£3.8m), the business faced the impact of declining bill payment transactions, rate reductions to a number of energy client contracts on renewal and the long-term decline of cash usage, with its effect on our ATM business and more broadly across bill payments, a trend accelerated during the early days of Covid-19. Our response has been to:
Our resilient service delivery and solid trading performance through Covid-19 was delivered through a proactive network and product recovery following the first lockdown, which was then sustained over later national lockdowns, and supported by our resilient, sustainable operating model, as evidenced by the tables below. Digital payments (eMoney) grew strongly and card payments have continued their strong performance with transactions in the fourth quarter 33.6% above the comparative period, benefitting from the broader consumer shift from cash to card and to more local shopping. After the first quarter, parcel volumes maintained year-on-year increases throughout the rest of the financial year. In the first month of the current financial year, we are seeing encouraging signs of continuing renewed activity in our card payment, parcel and ATM businesses.
Well ahead of the first national lockdown, we had swiftly moved to a revised operating model combining remote working, some essential office-based activity and continued field-based support for our retailer partners. The safety of our people was paramount, along with actively minimising any disruption to services and the support provided to clients, consumers and retailer partners. PayPoint has not furloughed any of its employees or accessed any of the available government assistance, instead focusing on tight cost management and deployment of resources, as well as suspending annual salary reviews and cancelling management bonuses for the previous financial year. Following the completion of the acquisition of Handepay/Merchant Rentals, we brought back their employees from furlough in March 2021 to return to sales activity and customer support.
The resilient performance of the business through the pandemic was further underpinned by a series of proactive initiatives to support clients, retailer partners and consumers. These included launching a partnership with Deliveroo to give our retailer partners the capability to deliver goods to their local communities, the PayPoint Retailer Heroes awards recognising retailers who had gone above and beyond to support consumers through the pandemic, the waiving of service fees for stores closed due to Covid-19, the postponement of the annual RPI service fee increase and a £25,000 contribution to the NFRN Covid-19 Hardship Fund, helping retailers adversely affected by Covid-19.
We believe as a result of our recognition and response to the structural changes in our traditional legacy markets, the business is now positioned with stronger and more relevant capabilities to deliver growth and take advantage of the enduring trends that have accelerated through Covid-19, including the continued shift from cash to digital payments, the growing demand for e-commerce fulfilment and the increase in shopping local.
A presentation for analysts is being held at 9.30am today, 27 May 2021, via webcast. This announcement is available on the PayPoint plc website: corporate.paypoint.com
CHAIRMAN’S STATEMENT
2020 was my first year as Chairman of the PayPoint Group and also one of the toughest years the business has ever faced. I am delighted with the way the management team led by Nick Wiles and all the employees of the Group have responded to the challenges of the global pandemic, to be reporting a solid performance despite the challenges and to have delivered great progress against our strategic objectives.
Governance
I am pleased to report that for the year under review, we have consistently applied the Principles of good governance contained in the 2018 UK Corporate Governance Code. The Board has this year begun to review the disclosures and management of climate related risks in readiness for the Task Force on Climate-Related Financial Disclosures. Full disclosure in accordance with those new regulations will be provided in our 2022 Annual Report.
Board succession
As announced earlier in the year, Nick became our Chief Executive in May, Alan Dale was appointed Finance Director in November, having acted as Interim Finance Director since July 2020 and Rakesh Sharma took over the role of Senior Independent Director from myself in May 2020. In addition, we welcomed Rosie Shapland, who joined the Board, in October 2020, as an Independent Non-Executive Director assuming the role of Chair of the Audit Committee in December 2020.
We have also seen some changes in the members of our Executive Board this year. We have welcomed Tanya Murphy, General Counsel and Head of Compliance; Ben Ford, Retail Services Director;; Mark Latham, Card Services Director, following our acquisition of Handepay/Merchant Rentals; and more recently Simon Coles, Chief Technology Officer
Board Evaluation
Our 2020 evaluation of the Board, its committees and individual Directors was externally facilitated by Oliver Zeihn of Lintstock Ltd. We are pleased to receive external confirmation that our Board and committees continue to operate effectively.
Annual General Meeting
The Company’s Annual General Meeting will be held at PayPoint’s registered office on 21 July 2021 where you will have the opportunity to meet the Board and members of the Executive Board. The matters to be approved by shareholders is set out in our Notice of Annual General Meeting which will be mailed to shareholders towards the end of June.
Ofgem Statement of Objections
On 30 September 2020, we announced that we had received a Statement of Objections from Ofgem setting out its provisional views that PayPoint infringed competition law through entering into certain contractual terms with certain energy suppliers and retailers for the provision of payment services to prepayment energy customers. We are considering Ofgem’s provisional views set out in the Statement of Objections. In accordance with IFRS, the Board has made a provision of £12.5 million as a current best estimate for a resolution of this matter.
If you wish to discuss any aspect of our governance arrangements, please contact me via our Company Secretary, Sarah Carne via email at [email protected].
Giles Kerr Chairman 26 May 2021
CHIEF EXECUTIVE’S REVIEW
This has been a transformative year for the PayPoint Group with a significant step change in strategic delivery and a resilient performance delivered across the business against the backdrop of Covid-19 government restrictions and structural changes to our traditional legacy cash business. Operationally, we have remained focused on managing our business by supporting our people, our clients and retailer partner network and the most vulnerable in the community. In addition, we have taken important steps to strengthen our operating model and organisational structure and to identify and support growth opportunities in our core UK business.
In spite of the challenges faced in the past year, the overall performance of the Group has been driven by our robust, agile response to Covid-19, focused on customer support, service development and enabling our people to work successfully and productively. After a challenging first quarter, this approach yielded a swift transaction and site recovery as government restrictions eased after the first lockdown and learnings were successfully applied to minimise the impact of further lockdowns in the year, which is testament to the focus and dedication of the whole business.
We have made good progress against our strategic priorities: embedding PayPoint at the heart of convenience retail; becoming the definitive parcels solution; sustaining leadership in ‘pay as you go’ and growing digital bill payments and building a delivery-focused organisation and culture. During the year, we have made a number of important steps to underpin this strategy through the acquisition of i-movo, Handepay/Merchant Rentals and RSM 2000 and securing full ownership of Collect+. In addition, we announced the successful disposal of our Romanian business in early April for a total consideration (including the trading profit for the year) of £48 million.
These steps, together with our internal investment plans, reinforce the focus on our UK markets and our confidence in the accelerated growth opportunities we see for the business.
The Executive Board has also been strengthened in key areas to deliver growth and focus on the UK market: Ben Ford, joined as Retail Services Director in July 2020; Tanya Murphy joined as General Counsel and Head of Compliance in September 2020; Mark Latham, joined as Card Services Director in February 2021 following the completion of the Handepay/Merchant Rentals acquisition; and Simon Coles, our Chief Technology Officer since 2017, has now joined the Executive Board. Our Environment, Social and Governance (ESG) agenda has also gathered pace in the year, as we consider our social responsibility and impact as a management team and business towards each of these key areas. Already, we have done important work to deliver a refresh of our purpose, vision and values, reflecting the enlarged PayPoint Group and how we deliver innovative, sustainable services and value for all our stakeholders. There is more for us to do in the year ahead in developing our overall ESG strategy and to ensure its principles are embedded in our strategy and value creation.
On 30 September 2020, we announced that we had received a Statement of Objections from Ofgem setting out its provisional views that PayPoint infringed competition law through entering into certain contractual terms with certain energy suppliers that confer exclusivity to PayPoint for the provision of payment services to prepayment energy customers in combination with exclusivity in retailer arrangements. Ofgem’s findings in the Statement of Objections are provisional and Ofgem states that no conclusion should be drawn that there has been an infringement at this stage. We are considering Ofgem’s provisional views set out in the Statement of Objections and based on the range of potential outcomes in such proceedings, we believe there will likely be a future outflow of funds in the next financial year. Our current best estimate for a resolution of this matter is £12.5m and we have accordingly made a provision for this in the current year. This estimated provision is not an admission of liability in relation to Ofgem’s provisional views in the Statement of Objections.
We are now much better positioned for growth and to take advantage of the enduring structural trends that have accelerated through the Covid-19 pandemic, including the continued shift from cash to digital payments, the growing demand for online shopping fulfilment and the increase in shopping local.
Outlook and dividend
As we begin the new financial year, we are already seeing some encouraging signs of continuing renewed activity in a number of areas of our business, in particular in card processing and parcels. We are also encouraged by the early performance and rapid integration of i-movo and Handepay/Merchant Rentals into the PayPoint Group and the new opportunities arising from the recently completed acquisition of RSM 2000. I am confident the steps we have taken during the 20/21 financial year have strengthened the business and better positioned us for both recovery in our legacy businesses and growth in our developing markets. As a result, we are confident in the business delivering further progress in the year ahead in response to the accelerated growth opportunities across our key markets
The Board has proposed a final dividend of 16.6p per share, an increase of 6.4%, consistent with our dividend policy of a target cover range of 1.2 to 1.5 times earnings, which reflects our long-term confidence in the business, the strength of our underlying cash flow and the enhanced growth prospects from the steps we have taken in the past year. In determining the level of dividend, the Board has sought to ensure a prudent level of earnings coverage for the dividend and to ensure that leverage is not substantially increased even in a scenario whereby the trading patterns seen through the pandemic period continue until the end of December 2021.
Nick WilesChief Executive 26 May 2021
MARKET OVERVIEW
Changing market dynamics are creating significant opportunities for PayPoint, with the business uniquely placed to take advantage of the continued shift from cash to digital payments, the growing demand for online shopping fulfilment and the increase in shopping local.
Key trends and changes since the end of the 19/20 financial year in the UK markets in which PayPoint operates include:
Convenience retail
Card payments
Cash Out
Parcels
Bill payments and top-ups
PROGRESS AGAINST OUR STRATEGIC PRIORITIES
PayPoint is well placed to take advantage of the trends that have accelerated over the past financial year due to Covid-19, including the continued shift from cash to digital payments, the growing demand for online shopping fulfilment and the increase in shopping local.
Our core strategic priorities for the business are:
1. Embed PayPoint at the heart of convenience retail2. PayPoint becomes the definitive parcel point solution3. Sustain leadership in ‘pay-as-you-go’ and grow digital bill payments4. Building a delivery focused organisation and culture
During the past year, we have taken a number of important steps to underpin this strategy through the acquisition of i-movo, Handepay/Merchant Rentals and RSM 2000, gaining full ownership of the Collect+ brand and the disposal of our Romanian business. The enlarged PayPoint Group now delivers a broader range of innovative services and technology connecting millions of consumers with an expanded universe of over 60,000 retailer partner and SME locations across multiple sectors.
These steps, together with our internal investment plans, underpin the focus on our UK markets and our confidence in the accelerated growth opportunities we see for the business.
Progress against the core strategic priorities is set out below:
PRIORITY 1: EMBED PAYPOINT AT THE HEART OF CONVENIENCE RETAIL
PayPoint continues to provide digital solutions, technology, payment services, increased footfall and basket spend to our retailer partners. Our UK network of more than 28,000 stores is bigger than all banks, supermarkets and Post Offices together, putting us at the heart of communities nationwide and comprising the best multiple, symbol and independent retailers in the UK. Our superior network means 99.4% of the urban population live within one mile of a PayPoint retailer partner and 98.3% of the rural population live within five miles.
Our network is enabled with technology designed to create a platform for growth and provide retailer partners with everything a modern convenience store needs. Core to this priority is PayPoint One, which includes EPoS and bill payment functionality, and other products such as card payments and ATMs. More broadly, we also provide card payments services to thousands of growing SMEs across the hospitality, auto trade, clothing and households goods sectors.
FY 20/21 Progress
PayPoint One
ATM
Card Services:
PRIORITY 2: PAYPOINT BECOMES THE DEFINITIVE PARCEL POINT SOLUTION
Collect+ is our technology-based platform to deliver best-in-class customer journeys for e-commerce brands and their customers over the ‘first and last mile’, supported by an extensive parcel pick-up and drop-off network, which comprises over 10,500 sites. We provide a footfall driver for retailer partners and a solution for carriers, including Amazon, eBay, DHL, DPD, Fedex, Hubbox, Parcels2Go and Yodel. Delivering high levels of consumer satisfaction with a Trustpilot rating of 4.5/5, our offering enables our carrier partners to improve service levels for their consumers in the crucial ‘last mile’ of deliveries, balancing the continued growth in online retail shopping with the realities of operating in a competitive low-margin market.
PRIORITY 3: SUSTAIN LEADERSHIP IN ‘PAY-AS-YOU-GO’ AND GROW DIGITAL BILL PAYMENTS
PayPoint is pioneering new ways of using digital payments so organisations can seamlessly and effectively serve their customers. Our market-leading omnichannel solution – MultiPay – is an integrated solution offering a full suite of digital payments. It enables transactions online and through smartphone apps and text messages, as well as over the counter, over the phone and via interactive voice response (IVR) systems. It also supports a full range of Direct Debit options, including scheduling collections, as well as new product developments such as PayByLink, recurring payments and Event Streamer.
Over-the-counter payments remain an important part of the UK economy, particularly for the 8 million UK consumers who rely on using cash for payments27. We will continue to retain our leadership in this area, through our superior retail network, coverage and service proposition. This business remains highly cash generative and enables us to invest in future growth and innovation
Major relationships renewal programme complete and expanding to digital services:
Digital payments growth and expanding portfolio:
Overall performance:
PRIORITY 4: BUILDING A DELIVERY FOCUSED ORGANISATION AND CULTURE
Underpinning PayPoint’s future success is the continued development and investment in our people, systems and organisation with the aim to create an efficient and high performance based culture with a focus on empowerment, engagement and customer service.
STRATEGY, BUSINESS DIVISIONS AND PRIORITIES FOR 2021/22
After a transformational year for the PayPoint Group, we are now much better positioned for growth in the UK with significant opportunities to deliver shareholder value as we maximise the opportunities available to the business. The enlarged PayPoint Group delivers a broader range of innovative services and technology connecting millions of consumers with an expanded universe of over 60,000 retailer partner and SME locations across multiple sectors.
What is now clear is that we are developing a strong portfolio of brands and businesses within the PayPoint Group, supporting our clients and retailer partners with innovative solutions and product offerings. As the business develops further in the year ahead, the intention is to develop these brands and businesses into different sizes of network within this expanded universe.
As we look to the future, and given the expansion and enhancement of the PayPoint Group’s capabilities, we will be updating how we describe and report on the business to reflect more accurately the market opportunities and service innovation driving growth in the UK. An outline of the reshaped business is provided below and this will be expanded on in greater detail at a Capital Markets Day later in the year:
PayPoint Group – what we do
We deliver innovative services and technology connecting millions of consumers with over 60,000 retailer partner and SME locations
Our three business divisions driving growth:
1. Payments & Banking
What we do:
We help consumers conveniently make and receive payments online and in-store for the biggest service brands in the UK
How we do it:
2. Shopping
We enhance the retailer proposition and consumer experience, driving footfall, new commission opportunities and better store management tools for thousands of SMEs and retailers across the UK
3. E-Commerce
We provide a technology-based platform to deliver best-in-class customer journeys for e-commerce brands and their customers over the ‘first and last mile’
PRIORITIES FOR 2021/22
To further reflect this positioning of the PayPoint Group, we are also making some adjustments to how we describe our strategic priorities to more accurately reflect the opportunities we see across the markets we serve. The priorities are as follows:
Priority 1: Embed PayPoint Group at the heart of SME and convenience retail businesses (Shopping business division)
FY 21/22 Priorities
Priority 2: Become the definitive technology-based e-commerce delivery platform for first and last mile customer journeys (E-commerce business division)
Priority 3: Sustain leadership in ‘pay as you go’ and grow digital payments (Payments & Banking business division)
Priority 4: Building a delivery focused organisation and culture (PayPoint Group)
KEY PERFORMANCE INDICATORS
PayPoint Group has identified the following KPIs to measure progress of business performance:
FINANCIAL REVIEW
OVERVIEW
In addition to the impacts from a number of headwinds and Covid-19, the above results reflect a number of corporate changes within the Group and some exceptional costs. The Romanian business has been sold and has been classified as a discontinued operation whilst the results of i-movo have been included from December 2020 and Handepay/Merchant Rentals from February 2021. A reconciliation of profit before tax from continuing operations to underlying profit before tax from continuing operations is provided on page 18 to aid clarity on performance.
Profit before tax from continuing operations of £19.4 million (2020: £50.0 million) decreased by £30.6 million (61.1%). This reflects the one-off expected prior year £3.8 million impact of the British Gas contract which ended in December 2019, the £2.1 million prior year variable pay benefit and £16.1 million current year exceptional costs which includes £3.6 million of expenses relating to the acquisitions and refinancing and a £12.5 million provision made in relation to the Ofgem Statement of Objections. Adjusting for these items, underlying profit before tax from continuing operations of £35.5 million (2020: £44.1 million) decreased by £8.5 million (19.3%).
Revenue from continuing operations decreased by £16.6 million (11.5%) to £127.7 million (2020: £144.3 million) with the ending of the British Gas contract contributing £6.1 million of the decrease. Net revenue from continuing operations decreased by £9.7 million (9.1%) to £97.1 million (2020: £106.8 million) including the £3.8 million British Gas impact. Underlying net revenue from continuing operations, which excludes the £3.8m British Gas impact, decreased by £5.9 million (5.7%) to £97.1 million (2020: £103.0 million). This was driven by headwinds of structural changes and margin pressure on UK bill payments and impacts of Covid-19 on UK bill payments, ATM and parcels. These were partially offset by growth in UK card payments, eMoney and service fees and acquisitions.
UK retail services net revenue increased by £4.0 million (10.6%) but was impacted by Covid-19 with a number of sites temporarily closed and consumer behaviour affecting volumes. PayPoint card payments net revenue increased by £3.4 million (39.1%) due to a significant increase in transactions (53.8%) with consumers using cards rather than cash due to Covid-19. Handepay/Merchant Rentals contributed a further £2.5m card payments and terminal leasing net revenue for the two months since acquisition. Service fees net revenue increased by £1.5 million (11.5%) driven by additional sales of PayPoint One and despite PayPoint not implementing the annual RPI increase to help retailer partners. ATM net revenue decreased by £2.2 million (17.9%) due to a reduction in transactions driven by the continuing trend of reduced demand for cash across the economy, accentuated by Covid-19, and the temporary closure of some sites due to Covid-19. Parcels and other net revenue decreased by £1.2 million (16.3%), impacted by Covid-19 reducing demand with consumers at home and, although overall transactions increased, these were diluted by lower margin from our print in store service transactions.
UK bill payments and top-ups net revenue of £52.1 million decreased by £13.7 million (20.8%) which included the £3.8 million impact of the British Gas contract which ended in December 2019. UK bill payments (including Mulitpay) net revenue decreased by £14.3 million (31.5%), or £10.5 million (25.4%) on an underlying basis (excludes the £3.8 million prior period net revenue from British Gas), due to the headwinds of structural changes and margin pressure and impacts of Covid-19, where consumers made less frequent and larger payments. MultiPay net revenue decreased by £0.3 million (6.8%) driven by a decrease in transactions due to Utilita moving customers to their own in-house app. UK top-ups and eMoney net revenue increased by £0.8 million (5.0%) with £1.8 million (25.8%) growth in e-money partially offset by £1.0 million (10.4%) decline in top-ups from Covid-19 and the continuing structural declines in the prepaid mobile sector.
Net revenue from the discontinued operation (Romania) increased by £0.7m (4.8%) to £15.3 million (2020: £14.6 million) through margin improvement in bill payments and top-ups.
Total costs from continuing operations of £61.5 million increased by £4.7 million (2020: £56.8 million). Underlying total costs, which exclude the £2.1 million prior year variable pay benefit, increased by £2.6 million (2020: £58.9 million) which was mainly driven by the additional cost base in relation to the newly acquired businesses, higher depreciation and amortisation (arising from investment in our back-office systems and the Collect+ brand asset) and higher finance costs due to use of the finance facility in case of Covid-19 impacts, partially offset by lower other costs of revenue associated with transaction volumes.
Total costs from the discontinued operation remained stable at £7.8 million, with higher administrative costs offset by lower depreciation and amortisation in the current year on assets classified as held for sale.
Exceptional costs of £16.1 million, which are one-off, non-recurring and do not reflect current operational performance, consisted of £2.8 million acquisition costs, £0.8 million refinancing costs on renewing and increasing our financing facilities to £107.5 million and the £12.5 million provision made in relation to the Ofgem Statement of Objections.
Reconciliation from profit before tax from continuing operations to underlying profit before tax from continuing operations
Underlying performance measures allow shareholders to better understand the underlying operational performance in the year. Prior year underlying profit before tax has been restated to exclude the variable pay benefit, as last year it was disclosed as a one-off benefit, and exclude the profit from the British Gas contract ending, as it was the largest contract in the business and this impact makes it more difficult to assess trends in financial performance.
Cash generation remained strong with £52.2 million (2020: £66.4 million) delivered from profit before tax of £27.0 million (2020: £56.8 million). There was a net working capital inflow of £0.8 million primarily benefiting from the VAT deferral offered by HMRC. Tax payments were lower than the prior year due to HMRC having brought payments on account forward by six months in the prior year. Dividend payments were lower compared to the prior year due to the end of the additional dividend programme.
Net corporate debt increased by £56.2 million to £68.2 million (2020: £12.0 million) due to the acquisitions made in the current year. At 31 March 2021 loans and borrowings were £86.6 million (2020: £70.0 million) which included £4.6 million of asset financing from the Merchant Rentals acquisition. New increased financing facilities were put in place in February 2021 to support the acquisition programme whilst the disposal of the Romanian business completed on 8 April 2021 and so the £48.3 million proceeds are not reflected in the year end numbers. The proceeds were used to reduce net debt.
SECTOR ANALYSIS
UK retail services
UK retail services are services PayPoint provides to retailer partners, which form part of PayPoint’s network, and SME partners. Services include providing the PayPoint One platform (which has a basic till application), EPoS, card payments, ATMs, parcels, terminal leasing and SIMs.
As at 31 March 2021, PayPoint had a live terminal in 28,067 UK sites (2020: 26,829 sites), an increase of 4.6% from 31 March 2020, primarily as a result of new sales and temporarily suspended sites due to Covid-19 returning to the network. PayPoint One sites increased by 10.6% to 17,805 sites (2020: 16,098 sites) since 31 March 2020 due to installs and 282 fewer Covid-19 suspended sites.
The following table shows the impact of Covid-19 on services provided in sites:
Net revenue increased by £4.0 million (10.6%) to £45.0 million (2020: £41.0 million). The net revenue of each of our key products is separately addressed below.
Service fees: This is a core growth area and consists of service fees from PayPoint One and our legacy terminal. Service fee revenue increased by £1.5 million (11.5%) to £14.6 million (2020: £13.1 million) driven by 1,707 additional PayPoint One sites since 31 March 2020, with increases in the higher price point EPoS Core and Pro sites. EPoS Core and Pro sites increased by 1,351 and 402 respectively since 31 March 2020, due to new sales, the EPoS Try Before You Buy trial and Covid-19 suspended sites returning. The PayPoint One average weekly fee per site increased by 5.8% to £16.3 (2020: £15.4), benefiting from the increase in EPoS Core and Pro sites which are charged at a higher rate and despite PayPoint not implementing the annual RPI increase to help retailer partners in the Covid-19 pandemic. Retailers taking the Core version of the product represent 46.7% (2020: 43.2%) of all PayPoint One sites and the Pro version represent 7.0% (2020: 5.2%). Legacy terminals now just remain in our multiple retailer partners.
Card payments: PayPoint card payments transaction volumes increased significantly by 53.8% to 210.4 million (2020: 136.8 million) benefiting from consumers using cards rather than cash due to Covid-19, with the preference of stores to take payment by card, and the increase in the contactless payment limit. Across our network there were 9,930 (2020: 9,435) PayPoint card payments sites, 495 sites more than the prior year due to new sales and Covid-19 suspended sites returning. PayPoint card payments net revenue increased by 39.1% to £12.1 million (2020: £8.7 million), this includes the £0.4 million impact of a goodwill gesture to retailer partners following a card services outage.
The new acquisitions of Handepay and Merchant Rentals generated £2.5m net revenue for the two months since acquisition. Handepay contributed £1.5 million from card payments and still had 10.4% of its SME partners not transacting at year end due to Covid-19. Merchant Rentals contributed £1.0 million from its terminal leasing business.
ATMs: ATM net revenue decreased by £2.2 million (17.9%) to £9.7 million (2020: £11.9 million) due to a 24.3% reduction in transactions to 30.6 million (2020: 40.4 million). This is attributable to a combination of the continued reduced demand for cash across the economy, accentuated by the Covid-19 preference for card use, and suspended sites from Covid-19. ATM sites remained stable at 3,626 sites (2020: 3,620 sites) with 159 fewer Covid-19 suspended sites. PayPoint continued to optimise its ATM network by relocating existing machines to better performing locations.
Parcels: Parcels net revenue decreased by 10.1% to £3.6 million (2020: £4.0 million), due to the impact of overall parcel transaction increases being diluted by lower margins for our print in store service. Parcel transactions increased by 8.3% to 26.6 million (2020: 24.5 million). Parcel sites increased by 1,863 from 31 March 2020 to 10,509 sites (31 March 2020: 8,646 sites), due to additional sites for the newer parcel partners and Covid-19 suspended sites returning.
Other: Other services provided include SIM sales and other ad hoc items which contributed £2.5 million net revenue. The decrease reflects the continuing decline in SIM sales, accentuated by the impact of Covid-19 on tourism.
UK bill payments
Bill payments is our most established category and consists of prepaid energy, bill payments and CashOut services. This sector also includes MultiPay which is our digital proposition, the seamlessly integrated omnichannel solution is a one-stop shop for digital and other customer payments, via any channel and on any device.
UK bill payments net revenue decreased by 35.6% to £30.9 million (2020: £45.1 million). Excluding the £3.8 million prior year net revenue from British Gas, net revenue decreased by £10.4 million (25.1%). Net revenue per transaction continued to increase and was up by 1.1 pence (6.3%) due to a 14.1% increase in the average transaction value for prepay energy and the ongoing improvement in mix to higher yielding clients. Transactions decreased by 93.9 million (35.6%), excluding British Gas transactions decreased by 23.5%. The decrease in bill payments transactions was primarily as a result of the continued switch to digital payment methods along with the impacts of Covid-19, where consumers are making larger payments and less frequently. UK bill payments revenue was restated to include the intercompany revenue recharge for transactional services with the discontinued operation.
MultiPay net revenue decreased by 6.8% to £4.2 million (2020: £4.5 million) and MultiPay transactions decreased by 7.6 million (23.1%) to 25.3 million (2020: 32.9 million) due to the planned Utilita switch to their in-house app. The non-Utilita MultiPay business net revenue increased by £0.4 million (14.1%) as a result of more clients taking the digital services and contribution from the new functionalities of Direct Debit and PayByLink.
UK top-ups & eMoney
Top-ups include transactions where consumers can top up their mobiles, prepaid debit cards and lottery tickets. This category also includes eMoney transactions where PayPoint provides the physical network for consumers to convert cash into electronic funds with online organisations.
Top-ups net revenue decreased by £1.0 million (10.4%). Top-ups transactions decreased by 6.1 million (20.0%) to 24.3 million (2020: 30.4 million) due to further market declines in the prepaid mobile sector whereby UK direct debit pay monthly options displace UK prepay mobile and Covid-19 impacts where consumers are making larger payments and less frequently.
eMoney net revenue increased by £1.8 million (25.8%) and transactions increased by 2.3 million (24.9%) to 11.4 million (2020: 9.1 million). eMoney transactions derive a substantially higher fee per transaction than traditional top-up transactions.
Romania (discontinued operation)
The sale of the Romanian business completed after the end of the financial year on 8 April 2021. The Romanian business comprised mainly of bill payments and top-ups operating on a similar basis to our UK business.
The number of sites decreased by 408 to 18,849 (2020: 19,257) due to an exercise to close non-performing sites. Bill payments transactions decreased by 1.9% to 98.1 million (2020: 100.0 million) and top-ups transactions increased by 1.3% to 12.5 million (2020: 12.4 million). The growth in other transactions was driven by card payments transactions. Net revenue increased by 4.8% which was driven by margin improvement in bill payments and top-ups.
TOTAL COSTS
Underlying costs from continuing operations, which exclude the current year exceptional costs and adjust for the £2.1m prior year variable pay benefit, increased by £2.6 million (4.4%). Excluding the cost base in relation to the newly acquired businesses of £2.0 million, underlying costs have increased by £0.7 million (1.1%). The anticipated cost increases in depreciation and amortisation relate to the investment in our back-office systems, together with the amortisation on the Collect+ brand asset. Finance costs increased due to the refinancing in the year to support acquisitions made and to ensure that in the longer term, PayPoint remains in a strong position to withstand a sustained period of disruption to trading should it occur as a result of Covid-19.
OPERATING MARGIN40
Operating margin from continuing operations before exceptional items of 38.0% (2020: 47.2%) declined by 9.2ppts due to a 9.1% decrease in net revenue from continuing operations.
PROFIT BEFORE TAX AND TAXATION
The tax charge for continuing operations of £4.3 million (2020: £10.0 million) on profit before tax from continuing operations of £19.4 million (2020: £50.0 million) represents an effective tax rate41 of 22.3% (2020: 19.9%), 2.4ppts higher than prior year due to an increase in disallowable expenses associated with the one-off acquisition and disposal costs.
STATEMENT OF FINANCIAL POSITION
Net assets of £39.5 million (2020: £38.3 million) increased by £1.2 million. Current assets decreased by £33.6 million to £169.9 million (2020: £203.5 million) with a lower cash balance due to consideration paid for acquisitions made in the year. Non-current assets of £121.1 million (2020: £54.5 million) increased by £66.6 million mainly due to the acquired businesses. Non-current liabilities of £30.5 million (2020: £0.8 million) increased mainly by the non-current portion of the 3 year term loan.
CASH FLOW AND LIQUIDITY
The following table summarises the cash flow movements during the year.
Cash generation remained strong with £52.2 million (2020: £66.4 million) delivered from profit before tax from continuing and discontinued operations of £39.5 million (2020: £56.8 million). There was a net working capital inflow of £0.8 million benefiting primarily from the VAT deferral offered by HMRC.
Taxation payments on account of £8.4 million (2019: £15.8 million) were lower than prior year due to HMRC bringing payments on account forward by six months in the prior year and a further £1.5 million corporation tax refund is expected early in the next financial year.
Capital expenditure of £6.0 million (2020: £8.4 million) was £2.4 million lower than the prior year. Capital expenditure primarily consists of IT hardware, PayPoint One terminals, EPoS and CRM development and T4 terminals in Romania. The reduction in capital expenditure was due to reduced CRM development as the core platform is now live partially offset by the purchase of T4 terminals in Romania. There was also an acquisition of the remaining 50% Collect+ brand asset that Yodel owned for £6.0 million.
At 31 March 2021 net corporate debt was £68.2 million (2020: £12.0 million). Total loans and borrowings of £86.6 million consisted of a £32.5 million term loan, £49.5 million drawdown of the £75.0 million revolving credit facility and £4.6 million of asset financing balances (2020: £70.0 million drawdown from the old revolving credit facility). A refinancing took place to support the acquisitions made during the year whilst the disposal of the Romanian business completed on 8 April 2021 and so the £48.3 million proceeds are not reflected in the year end numbers. The proceeds were used to reduce net debt.
DIVIDENDS
Due to the need to preserve cash at a time of uncertainty as a result of Covid-19, the additional dividend programme announced in May 2016 was suspended in March 2020 and we confirmed in the prior year financial statements that it will not be reinstated.
We have declared an increase of 6.4% in the final dividend of 16.6 pence per share (2020: 15.6 pence per share) payable in equal instalments of 8.3 pence per share (2020: 7.8 pence per share) on 29 July 2021 and 30 September 2021 to shareholders on the register on 24 June 2021 and 26 August 2021 respectively. The final dividend is subject to the approval of the shareholders at the annual general meeting on 20 July 2021. No additional dividend has been declared (2020: no final additional dividend was declared).
The final dividends will result in £11.4 million (2020: £10.7 million) being paid to shareholders from the standalone statement of financial position of the Company which, as at 31 March 2021, had approximately £56.9 million (2020: £58.5 million) of distributable reserves.
An interim ordinary dividend of 15.6 pence (2020: 15.6 pence) and no additional interim ordinary dividend (2020: 18.4 pence) was paid in equal instalments of 7.8 pence on 29 December 2020 and 8 March 2021.
CAPITAL ALLOCATION
The Board’s immediate priority is to continue to preserve PayPoint’s balance sheet strength to ensure PayPoint emerges in a strong position following the Covid-19 crisis. The Group maintains a capital structure appropriate for current and prospective trading over the medium term that allows a healthy mix of dividends and cash for investment through capital expenditure and acquisitions. The Board’s approach to the setting of the ordinary dividend has not materially changed since the prior year end and follows the following capital allocation priorities:
GOING CONCERN
The financial statements have been prepared on a going concern basis having regard to the identified principal risks and uncertainties and viability statement on pages 25 to 29. Our cash and borrowing capacity provides sufficient funds to meet the foreseeable needs of the Group including dividends.
Alan DaleFinance Director
26 May 2021
PRINCIPAL RISKS AND UNCERTAINTIES
The Board considers these to be the most significant risks and uncertainties faced by the Group.
StrategyRisks are assessed through PayPoint’s risk management and internal control framework which are designed to identify and manage risk.
Processes apply throughout the Group and are designed to manage rather than eliminate risk. The Board is responsible for overseeing the risk management process and approves levels of acceptable risk. The Board is also responsible for maintaining an appropriate control environment to manage risk effectively. The Audit Committee supports the Board in reviewing the effectiveness of risk management and internal controls to the Audit Committee. The risk management and internal control frameworks aim to provide assurance and confidence to stakeholders about PayPoint’s ability to deliver its objectives and manage risks.
Risk appetitePayPoint’s risk appetite is set by the Board with the goal of aligning the level of risk considered appropriate to achieving strategic objectives, increasing financial returns and adhering with statutory requirements. The Board and the Chief Executive have key roles in implementing the risk appetite through PayPoint’s policies and procedures, delegated authorities and internal controls. Risk appetite is embedded in all core processes across the Group.
Risk identification and managementThe risk management process assesses strategic and operational risk across all areas of the business and functional risk registers are maintained which form an important component of our governance framework. Risks are identified by senior management and Executive Board members for each functional area and discussed with The Head of Risk and Internal Audit. Risks identified are documented in functional risk registers which contain a risk description, assessment of materiality, probability, mitigating controls, residual risk and risk owners. In addition to bottom-up functional risk identification. The risk framework also encompasses top-down assessment processes and horizon scanning to identify emerging risks trends and technologies as well as identifying and preparing for new legislation and regulation. At least annually, risks are assessed and agreed with Executive Board members and form the basis of principal and emerging risks. The Audit Committee receives and reviews information on the risk framework and principal and emerging risks and advises the Board on risks.
The principal risks are similar to last year however there are some key changes. Key partners and suppliers is no longer considered a principal risk and the underlying risk of disruption is included under the business interruption principal risk. Losing key clients and retailers risk is incorporated into a new operating model principal risk and an emerging risk regarding emerging technology was elevated to a principal risk during the year. Risk to the business from Covid-19 impact many principal risks and each incorporate specific Covid-19 risks where applicable.
The table below sets out our principal risks and emerging risks, the potential impact, mitigation strategies, status and their movement during the year. They do not comprise all risks faced by the Group and are not set out in order of priority.
VIABILITY STATEMENT
In accordance with the 2018 UK Corporate Governance Code, the Directors have assessed the viability of the Group over a three-year period, taking account of the Group’s current financial and trading position, the principal risks and uncertainties (as set out on pages 25 to 28) and the strategic plans that are reviewed at least annually by the Board.
The Directors believe that a three-year period remains an appropriate period over which a reasonable expectation of the Group’s longer-term viability can be evaluated and is aligned with the Group’s most recent strategic and financial planning time horizon, which was reviewed by the Board in March 2021. It reflects the nature of PayPoint’s key product and client relationships and the markets in which we operate as described on page 8 of this report.
PayPoint’s strategic and financial planning process reflects the Directors’ best estimate of the prospects for the Group including assumptions around key client renewals, new client and sector targets, integration of acquisitions and the development of existing and new key products and service lines.
The Directors have carried out an assessment of the principal risks and uncertainties (which are set out on pages 25 to 28) and applied several different but plausible scenarios arising from those risks to test the Group’s viability. These scenarios include:
Competition and Markets and operating model:
In the unusual set of circumstances of all the above significant scenarios occurring together, the viability scenario also factors mitigations including achievable reductions in expenditure and a reduction in level of dividends following the payment of the final dividend of 16.6p declared in respect of financial year ending 31 March 2021.In last year’s annual report there was a specific consideration of a Covid-19 scenario but based on the solid business performance in the financial year the Directors consider this is no longer required.
Based on this assessment and the availability of sufficient financing facilities, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the viability period.
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The financial statements were approved by the Board of Directors and authorised for issue on 26 May 2021 and were signed on behalf of the Board of Directors.
Nick WilesChief Executive26 May 2021CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CASH FLOWS
Reconciliation of cash and cash equivalents
NOTES TO THE FINANCIAL STATEMENTS
1. Significant accounting policiesBasis of preparation
This preliminary announcement does not constitute the Company's statutory accounts for the years ended 31 March 2021 or 31 March 2020, but is derived from the statutory accounts and has complied with International Financial Reporting Standards (IFRS). This announcement does not contain sufficient information to fully comply with IFRS. The Company expects to publish full financial statements that comply with IFRS in due course.
Statutory accounts for 2020 have been delivered to the Registrar of Companies and those for 2021 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts and the report was unqualified, did not draw attention to any emphasis of matters and did not contain statements under s498(2) or (3) of the Companies Act 2006.
This preliminary announcement complies with the recognition and measurement criteria of IFRS, and with the accounting policies of the Group which are set out in the 2021 Annual Report. The accounting policies applied are consistent with the prior year apart from non-current assets held for sale and discontinued operations and deferred, contingent consideration as set out in the 2021 Annual Report. No subsequent material changes have been made to the Group’s accounting policies with selected accounting policies included below.
The financial statements have been prepared on a going concern basis. The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt to equity balance. The capital structure of the Group consists of debt, cash and cash equivalents and equity attributable to equity holders of the parent comprising capital, reserves and retained earnings. The Group’s policy is to borrow centrally to meet anticipated funding requirements. Our cash and borrowing capacity provides sufficient funds to meet the foreseeable needs of the Group. At 31 March 2021, the Group had cash and cash equivalents of £64.8 million, including £46.5 million of clients’ funds and retailer partners’ deposits. At 31 March 2021, the Group had cash and cash equivalents from continuing operations of £38.9 million, including £28.4 million of clients’ funds and retailer partners’ deposits. In addition, following refinancing in the year the Group has in place a three-year £32.5m amortising term loan and a three-year unsecured £75 million revolving credit facility expiring in February 2024. At 31 March 2021, £49.5 million (2020: £70 million) was drawn down from the revolving credit facility to finance the acquisitions made in the year. At 31 March 2021 the Group also had £4.6 million (2020: £nil) of block loan balances. The Group has a strong statement of financial position, with net assets of £39.5 million as at 31 March 2021, having made a profit for the year of £21.5 million and delivered net cash flows from operating activities of £55.4 million for the year then ended. The Group has net current liabilities of £51.2m (2020: £15.4m). On 8 April 2021 the Group received £48.3 million proceeds from the disposal of the Romanian business. The proceeds were used to reduce net debt.
The Directors have prepared cash flow forecast scenarios for a period of at least 12 months from the date of this announcement, taking into account the Group’s current financial and trading position, the principal risks and uncertainties and the strategic plans that are reviewed at least annually by the Board. Additionally, the Directors have carried out an assessment of the principal risks and uncertainties and applied several severe but plausible scenarios to further test the Group viability, these included a reduction in the volume of transactions, loss of key contracts and under-performance of acquisitions and new products or service lines. As mitigating actions we have assumed achievable reductions in expenditure and a reduction in the level of future dividends following the payment of the final dividend of 16.6 pence per share declared in respect of financial year ending 31 March 2021.
The cash flow forecasts included an analysis and stress test for the above scenarios to ensure working capital movements within a reporting period do not trigger a covenant breach. Based on this assessment, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of not less than 12 months from the date of this announcement and therefore have prepared the financial statements on a going concern basis.
Adoption of standards
The accounting policies applied by the Group in the financial statements for the year ended 31 March 2021 are the same as those set out in the Group’s Annual Report for the year ended 31 March 2020, apart from non-current assets held for sale and discontinued operations, deferred, contingent consideration and government grants which are detailed below.
Non-current assets held for sale and discontinued operations A non-current asset or a group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year.
On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell with any adjustments taken to profit or loss. The same applies to gains and losses on subsequent remeasurement although gains are not recognised in excess of any cumulative impairment loss. Any impairment loss on a disposal group is first allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Group’s accounting policies. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated.
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. The post-tax profit or loss of the discontinued operations is shown as a single line on the face of the consolidated income statement, separate from the continuing operating results of the Group. When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation had been discontinued from the start of the comparative period.
Deferred, contingent considerationWhere a business combination agreement provides for an adjustment to the consideration, contingent on future performance over the contractual earnout period, the Group accrues the fair value, based on the estimated additional consideration payable as a liability at the acquisition date. To the extent that the contingent consideration is payable after more than one year from the acquisition date, the contingent consideration is discounted at an appropriate interest rate and carried at net present value in the consolidated statement of financial position. The discount component is then unwound as a finance cost in the consolidated statement of profit or loss over the life of the earnout. The liability is measured against the contractually agreed performance targets at each subsequent reporting date with any adjustments recognised in the consolidated statement of profit or loss. Where the contingent consideration is contractually linked to ongoing employment of the founders over the contractual period it is treated as an expense and recognised in the consolidated statement of profit or loss.
Government grantsGovernment grants have been accounted for in line with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. Grants for the reimbursement of operating expenditure are deducted from the related category of costs in the income statement.
Alternative performance measuresNon-IFRS measures or alternative performance measures are used by the Directors and management for performance analysis, planning, reporting and incentive-setting purposes and have remained consistent with the prior year, other than underlying performance measures as defined below. These measures are included in these financial statements to provide additional useful information on performance and trends to shareholders.
These measures are not defined terms under IFRS and therefore they may not be comparable with similarly titled measures reported by other companies. They are not intended to be a substitute for, or superior to, IFRS measures.
Underlying performance measures (non-IFRS measures)Underlying performance measures allow shareholders to better understand the underlying operational performance in the year, to facilitate comparison with prior years and to better assess trends in financial performance. They usually exclude the impact of one-off, non-recurring and exceptional items (exceptional items are disclosed in note 5).
Net revenue (non-IFRS measure)Net revenue is revenue less commissions paid to retailer partners and the cost of mobile top-ups and SIM cards where PayPoint is principal. This reflects the benefit attributable to PayPoint’s performance eliminating pass-through costs which creates comparability where PayPoint is agent or principal and is an important measure of the overall success of our strategy.
The reconciliation of revenue to net revenue is as follows:
1 Comparative information has been restated for the discontinued operation (note 9).
Effective tax rate (non-IFRS measure)Effective tax rate is the ongoing tax cost as a percentage of the net profit before tax.
Reported dividends (non-IFRS measure)Reported dividends are based on a financial year’s results from which the dividend is declared and consist of an interim and final dividend. This is different to statutory dividends where the final dividend on ordinary shares is recognised in the following year when they are approved by the Company’s shareholders.
Cash generation (non-IFRS measure)Cash generation reflects earnings before tax, depreciation, amortisation and exceptional items adjusted for working capital (excluding movement in clients’ funds and retailers’ deposits) as detailed in note 19. This measures the cash generated which can be used for tax payments, new investments and financing activities.
Total costs (non-IFRS measure)Total costs comprise other costs of revenue (note 4), administrative expenses, finance income and finance costs. Total costs exclude exceptional costs.
Operating margin before exceptional items (non-IFRS measure)Operating margin before exceptional items is calculated by dividing operating profit before exceptional items by net revenue. This measure reflects the efficiency of converting revenue into profits.
Net corporate debt (non-IFRS measure)Net corporate debt represents cash and cash equivalents excluding cash recognised as clients’ funds and retailers’ deposits, less amounts borrowed under financing facilities (excluding IFRS 16 liabilities).
The reconciliation of cash and cash equivalents to net corporate debt is as follows:
Revenue accounting policy
Revenue represents the value of services and goods delivered or sold to clients and SME and retailer partners which is measured using the fair value of the consideration received or receivable, net of value added tax. Performance obligations are identified at contract inception and the revenue is recognised once the performance obligations are satisfied.
Revenue from bill payments comprises fees from clients for providing over-the-counter payments, digital bill payments and CashOut services. Over-the-counter and digital payments services are products where customers of PayPoint’s clients can pay their bills (due to the client) at any of PayPoint’s retailer partners or online. PayPoint provides the technology for recording the payment of bills and transmission of that payment data to the client. PayPoint also collects bill payment funds from retailer partners and remits those funds to clients. Revenue is recognised as performance obligations are satisfied which is usually at the point in time each transaction is processed. Management fees, set-up fees or up-front lump sum payments are deferred and recognised on a straight-line basis over the contracted period with the client.
Top-ups and eMoney revenue comprises revenue from top-ups for mobile phones, eVouchers, prepaid debit cards and lottery tickets. Revenue is recognised at the point in time each top-up is sold. Other than as described below, PayPoint is contracted as agent in the supply of top-ups and accordingly the commission earned from clients is recognised as revenue. In Romania, PayPoint contracts as principal for mobile top-ups and revenue is recognised at the gross sale price and cost of revenue includes the related cost.
Retail services revenue from SME and retailer partners comprises:
Exceptional items
Exceptional items (note 5) are typically non-recurring or intermittent, and because of their nature and expected infrequency of the events giving rise to them, do not reflect current operational performance. Examples of exceptional items include, but are not limited to:
Use of judgements and estimates
In the application of the Group’s accounting policies, 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.
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 judgement: recognition of cash and cash equivalentsThe nature of bill payments services means that PayPoint collects and holds funds on behalf of clients as those funds pass through the settlement process and also retains retailer partners’ deposits as security for those collections.
A critical judgement in this area is whether clients’ funds and retailer partners’ deposits are recognised in the statement of financial position. This includes evaluating:
(a) existence of a binding agreement clearly identifying the beneficiary of the funds (b) the identification, ability to allocate and separability of funds (c) identification of the holder of those funds at any point in time (d) whether PayPoint bears the credit risk
Where there is a binding agreement specifying that PayPoint holds funds on behalf of the client (i.e. acting in the capacity of a trustee) and those funds have been separately identified as belonging to that beneficiary, the cash and the related liability is not included in the statement of financial position. In all other situations the cash and corresponding liability are recognised on the statement of financial position.
Critical judgement: agent vs principal A critical judgement for revenue recognition is PayPoint’s assessment of whether it is acting as a principal or agent. This includes evaluating:
(a) which party was responsible for fulfilling the promise to provide the service (b) inventory risk before the service is transferred to a customer (c) discretion in establishing the price for the service
In most cases it is clear that PayPoint acts in the capacity of an agent for clients, however in the case of mobile top-ups, due to the nature of the product, this becomes a key judgement area. Revenues are recognised on the principal basis considering the level of service responsibility, inventory risk and price discretion held by PayPoint. This is consistent with the judgement in prior years.
The cost of mobile top-ups and SIM cards as principal was £46.9 million (2020: £50.3 million), refer to note 4.
Critical estimate: Business combinations: Initial recognition of goodwill and intangible assetsAccounting for a business combination requires an assessment of the existence, fair value and expected useful economic lives of separable intangible assets such as brands, customer relationships and developed technology assets at the date of acquisition. The fair value attributed to intangible assets arising on acquisition is recognised in accordance with IAS 38 Intangible Assets and is based on a number of estimates, including the long-term revenue growth rate of the related business and discount rate. The fair value of acquired intangible assets in the year relating to Handepay and Merchant Rentals amounted to £20.1 million whilst £44.7 million was recognised as goodwill. Of the intangible assets recognised on the acquisition of Handepay and Merchant Rentals, the Handepay and Merchant Rentals customer relationship intangible assets are deemed to be critical estimates.
Acquired customer relationships attributed to Handepay and Merchant Rentals are valued using the multi-period excess earnings method (“MEEM approach”) by estimating the total expected income streams from customer relationships and deducting portions of the cash flow that can be attributed to supporting, or contributory, assets (including workforce). The residual income streams are discounted. No tax amortisation benefit is applied. The key inputs to this method are the customer churn rate, revenue growth rate and discount rate applied to future forecasts of the businesses. A reasonably possible change to these assumptions in aggregation, or to customer churn rate in isolation, impacts on the financial statements as follows:
Critical estimate: Valuation of deferred, contingent consideration Where a sale and purchase agreement provides for an adjustment to the consideration, contingent on future performance over a contractual earn-out period, the Group recognises the discounted fair value as a liability in the consolidated statement of financial position , based on the estimated additional consideration payable at the acquisition date. At each subsequent reporting date, the liability is measured against the contractually agreed performance targets with any fair value adjustments recognised in the consolidated statement of profit or loss. The estimation of the liability requires the Directors to make an estimate of future performance of the related business over the earnout period, based on Board-approved forecasts. For the revenue-linked contingent consideration recognised on PayPoint’s consolidated statement of financial position, the range of reasonably possible outcomes for the fair value of the undiscounted earnout is £4.5 million to £6.0 million by applying a reasonably possible 20% sensitivity to the board-approved revenue forecasts.
Prior year critical estimatesCapitalised development expenditure and useful economic lives of intangibles assets, which were critical estimates in the previous financial year, are no longer considered to be critical estimates. At 31 March 2021 these estimates no longer have a significant risk of resulting in material adjustment to the carrying amounts of intangible assets within the next financial year. The useful economic lives of intangible assets including capitalised development expenditure are reviewed annually. Potential write-offs and revisions to the useful lives of intangible assets are not expected to materially impact the annual amortisation charge and the carrying amounts of intangible assets in the next financial year.
2. Segment reportingSegment informationThe Group provides a number of different services and products, however these do not meet the definition of different segments under IFRS 8, as the chief operating decision maker, the Executive Board, does not review those separately for resource allocations purposes, therefore the Group has only one operating segment. A sector analysis has been provided in the Financial review on pages 19 to 21.
Geographical information
Revenue
Comparative information has been restated for the discontinued operation (note 9).
Non-current assets
3. RevenueDisaggregation of revenue
Service fee revenue of £14.6m (2020: £13.1m) and management fees, set-up fees and up-front lump sum payments of £1.2m (2020: £1.5m) are recognised on a straight-line basis over the period of the contract. The remainder of revenue is recognised at the point in time when each transaction is processed. The normal timing of payment by customers is usually on fourteen day terms.
Seasonality of operations PayPoint operates in many sectors each with their own form of seasonality. The energy bill payment and parcel sectors are the most seasonal sectors with the energy sector generating more transactions during the winter months and parcels generating higher volumes in the lead up to Christmas. As a result, higher revenue and operating profits are usually expected in the second half of the year rather than in the first six months. This does not constitute “highly seasonal” as considered by IAS 34 Interim Financial Reporting.
Contract balances
The net investment in finance lease receivables balance of £10.6m (2020: £nil) increased in the current year due to the acquisition of Merchant Rentals in February 2021.
4. Cost of revenue
5. Exceptional items
1 Comparative information has been restated for the discontinued operation (note 9). Underlying performance measures allow shareholders to better understand the underlying operational performance in the year. Prior year underlying profit before tax has been restated to exclude the variable pay benefit, as last year it was disclosed as a one-off benefit, and exclude the profit from the British Gas contract ending, as it was the largest contract in the business and this impact makes it more difficult to assess trends in financial performance.
6. Tax
The income tax charge is based primarily on the United Kingdom statutory rate of corporation tax for the year of 19% (2020: 19%). The tax charge on continuing operations for the year is reconciled to profit before tax from continuing operations, as set out in the consolidated statement of profit or loss, as follows:
7. Dividends on equity shares
The proposed final ordinary dividend is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements.
8. Earnings per shareBasic and diluted earnings per share are calculated on the following profit and number of shares:
9. Discontinued operationOn 21 October 2020, PayPoint announced that it had signed an agreement to sell its Romanian business, PayPoint Services SRL, to Innova Capital (the sale included Payzone SA, which was legally merged with PayPoint Services SRL on 27 March 2021). The sale was consistent with PayPoint’s focus on its key strategic priorities and the delivery of enhanced growth and value in its core UK markets. The sale was subject to regulatory and other customary approvals, as well as other conditions precedent, and completed on 8 April 2021, following the end of the financial year ended 31 March 2021 (note 20). Cash proceeds received were £48.3 million net of working capital adjustments. The Romanian business has been classified as a discontinued operation for the year ended 31 March 2021.
As the sale completed following the end of the financial year the major classes of assets and liabilities comprising the discontinued operation were classified as held for sale as at 31 March 2021 as follows:
The Romanian business was not previously classified as a discontinued operation. The comparative consolidated statement of profit or loss has been restated to show the discontinued operation separately from continuing operations.
UK revenue has been restated to include the £0.6 million (2020 £0.7 million) intercompany revenue recharge for transactional services with the discontinued operation. Subsequent to the disposal, the Group will continue to recharge the discontinued operation for transactional services. Although intra-group transactions have been fully eliminated in the consolidated financial results, PayPoint has elected to attribute the elimination of transactions between the continuing and discontinued operation before the disposal in a way that best reflects the continuance of these transactions subsequent to the disposal. To achieve this presentation, the discontinued operation results include the intercompany cost for transactional services within the expenses line below.
The results of the discontinued operation, which have been included in the profit for the period, were as follows:
The results of the discontinued operation do not reflect £0.4m depreciation and amortisation relating to the period over which its assets were classified as held for sale, in accordance with IFRS 5.
Cash flows from discontinued operation
10. AcquisitionsCollect+ GroupOn 6 April 2020, PayPoint plc acquired the remaining 50% of the asset that Yodel owned, resulting in Collect+ becoming a fully owned brand within the PayPoint Group. From 6 April 2020, Collect+ Holdings Limited and Collect+ Brand Limited (Collect+ Group) were fully owned and controlled subsidiaries.
The agreement reaffirmed the long-term partnership with Yodel, committing to a multi-year contract to continue as a parcel carrier for Collect+. PayPoint also acquired the ownership of the Collect+ website domain which has been developed and a new Collect+ website has been launched.
Total consideration payable was £6.0 million cash paid on completion resulting in a net £5.1 million cash outflow on acquisition (net of cash acquired). An intangible brand asset of £6.0 million has been recognised initially at cost and will be amortised over a useful life of 12 years.
In the period since acquisition, the Collect+ Group earned revenue of £2.5 million and profit before tax of £2.5 million.
i-movo On 24 November 2020, PayPoint acquired 100% of i-movo Holdings Limited and its wholly owned subsidiary i-movo Limited for initial consideration of £1.7 million cash and £1.0 million shares, resulting in a net £1.4 million cash outflow on acquisition (net of cash acquired) and 170,882 shares issued at a fair value of £5.9 per share. The increase in share capital and merger reserve in the current year resulted from the share consideration on acquisition of i-movo. The fair value of the ordinary shares issued was based on the average of the middle market listed share price for an ordinary share of the Company for each of the five business days immediately preceding the allotment and issue of the share consideration.
As the UK’s leading secure digital vouchering system, i-movo will enhance our EPOS and terminal services proposition and create new opportunities with Newspaper, Government, FMCG, Utilities and banking clients.
There is also an element of contingent consideration over the 29-month earnout period linked to four monthly revenue growth targets on two potential key revenue streams, which is estimated to total £6.0 million (on an undiscounted basis) at the acquisition date and at 31 March 2021 based on Board-approved forecasts. The contingent consideration is capped at £6.0m (£4.0m cash and £2.0m shares). The Directors are required to make an estimate regarding the future results in order to determine the fair value of the discounted contingent consideration liability. Any subsequent revaluations to contingent consideration as a result of changes in such estimations are recognised in the consolidated statement of profit or loss.
An i-movo customer relationship asset of £1.5 million has been recognised and is being amortised over a useful life of 12 years.
In the period since acquisition, i-movo earned revenue of £0.4 million and reported profit before tax of £nil. Had the acquisition taken place on the first day of the financial year, revenue would be £0.9 million and profit before tax would be £nil. Acquisition costs incurred in the year in relation to i-movo totalled £0.1 million, which are reported within exceptional items in profit or loss.
Handepay and Merchant RentalsOn 3 February 2021, PayPoint acquired 100% of Handepay Ltd for total cash consideration of £50.7 million and Merchant Rentals Ltd for total cash consideration of £15.5 million, resulting in a net £60.3 million cash outflow on acquisition (net of cash acquired).
The acquisition of Handepay and Merchant Rentals significantly enhances PayPoint’s existing cards business, creating access to new SME sectors including food services, garages and hospitality and the opportunity to accelerate the growth of the combined business in a growing cards market through clear operational initiatives, cross selling opportunities and synergies.
A Handepay intangible brand asset of £2.2 million has been recognised and is being amortised over a useful life of 15 years. A Merchant Rentals intangible brand asset of £0.7 million has been recognised and is being amortised over a useful life of 11 years. Handepay customer relationship assets of £10.2 million have been recognised and are being amortised over a useful life of 10 years. Merchant Rentals customer relationship assets of £6.7 million have been recognised and are being amortised over a useful life of 4 to 13 years.
In the period since acquisition, Handepay earned revenue of £1.8 million and profit before tax of £0.7 million and Merchant Rentals earned revenue of £1.0 million and profit before tax of £0.5 million (on an unconsolidated basis). Had the acquisition taken place on the first day of the financial year, Handepay revenue would be £10.8 million and profit before tax would be £5.2 million and Merchant Rentals revenue would be £5.3 million and profit before tax would be £1.2 million (on an unconsolidated basis). Acquisition costs incurred in the year in relation to Handepay and Merchant Rentals totalled £2.5 million, which are reported within exceptional items in profit or loss.
The following table summarises the fair values of the identifiable assets purchased and liabilities assumed of the acquired companies as at the date of acquisition:
The acquired identifiable assets and liabilities have been recognised at their fair values at acquisition date and in accordance with the Group’s accounting policies (note 1):• Acquired brands have been valued using the relief-from-royalty method and acquired customer relationships have been valued using the multi-period excess earnings method. • Acquired software intangible assets and property, plant and equipment have been valued using the depreciated replacement cost method, considering factors including economic and technological obsolescence. • Inventories, trade receivables and trade payables have been assessed at fair value on the basis of the contractual terms and economic conditions existing at the acquisition date, reflecting the best estimate at the acquisition date of contractual cash flows not expected to be collected. • The net investment in finance lease is measured at its acquisition date fair value, determined based on the assumptions about discount rates and other factors that market participants would use.
The values presented above other than corporate cash, clients’ funds and retailer deposits and loans and borrowings represent the best estimate based on information available at the acquisition date and are therefore subject to adjustment within the measurement period if new information about facts and circumstances that existed at the acquisition date is obtained and, if known, would have resulted in the recognition of those assets and liabilities at that date.
Of the £51.6 million (2020: £nil) of goodwill acquired during the period, no goodwill (2020: £nil) is expected to be deductible for tax purposes. The goodwill arising on acquisitions is attributable to workforce in place and know-how within the business, new customer relationships as well as the growth in new customers that is anticipated to arise post-acquisition and the fair value of the expected market participant synergies and other benefits arising from the acquisition.
11. Trade and other receivables
1 Items in the course of collection represent amounts collected for clients by retail partners. An equivalent balance is included within trade and other payables.
12. Cash and cash equivalentsIncluded within continuing cash and cash equivalents of £38.9 million (2020: £69.4 million) are balances of £28.4 million (2020: £20.1 million) relating to funds collected on behalf of clients where PayPoint has title to the funds (clients’ funds) and where retailer partners have provided security deposits (retailer partners’ deposits). An equivalent balance is included within trade payables (note 13). Clients’ funds held in trust which are not included in cash and cash equivalents amounted to £50.3 million (2020: £41.9 million).
During the year the Group operated cash pooling amongst most of its bank accounts in the UK whereby individual accounts could be overdrawn without penalties being incurred so long as the overall position is in credit.
13. Trade and other payables
1 Relates to monies collected on behalf of clients where the Group has title to the funds (clients’ funds and retailer partners’ deposits). An equivalent balance is included within cash and cash equivalents.2 Payable in respect of amounts collected for clients by retailer partners. An equivalent balance is included within trade and other receivables.
14. Provision
Further to our announcement on 30 September 2020 we continue to engage with Ofgem with respect to the provisional views set out in their Statement of Objections. In accordance with IFRS the Board has made a provision of £12.5 million (2020: £nil) as a current best estimate for a resolution of this matter.
15. Deferred, contingent consideration liabilityThe Group has a liability in respect of the deferred, contingent consideration under the i-movo acquisition contract (note 10).
The total discounted deferred, contingent consideration liability of £5.7 million is categorised as Level 3 in the fair value hierarchy. The fair value of the expected earnout is updated at each reporting date, determined using a probability-weighted average best estimate of discrete scenarios, based on the latest revenue forecasts which were approved by the Board discounted to present value. There was no change in the valuation of the deferred, contingent consideration liability between acquisition and 31 March 2021. The significant unobservable inputs used in the fair value measurements are the discount rate and the forecast future revenue of the acquired business which is approved by the Board. The Directors consider that the carrying amount of the deferred, contingent consideration liability of £5.7 million approximates to its fair value.
16. Share capital and merger reserve
The increase in share capital by £1,000 and merger reserve by £0.9 million in the current year resulted from the share consideration on acquisition of i-movo. 170,882 shares were issued at a fair value of £5.9 per share. The fair value of the ordinary shares issued was based on the average of the middle market listed share price for an ordinary share of the Company for each of the five business days immediately preceding the allotment and issue of the share consideration.
17. Share based paymentsThe Group’s share schemes are described in the Directors’ Remuneration Report in the 2021 Annual Report and consist of the Long Term Incentive Plan (LTIP), Deferred Annual Bonus Scheme (DABS) and Restricted Share Awards (RSA) equity-settled share schemes.
No share awards were granted under the LTIP scheme in the year (2020: 192,675). The LTIP scheme has been replaced with the RSA scheme in the current financial year. For LTIP share awards granted in previous years, 50% of the vesting is based on Total Shareholder Return (TSR) and 50% on earnings per share (EPS) growth). The performance condition for the TSR element is the same as the vesting period. The performance period for the EPS element is for three financial years from the grant date.
200,013 share awards were granted under the RSA scheme in the year (2020: nil), vesting over two to five years, between 26 July 2022 and 26 July 2025. The RSAs do not contain any IFRS 2 performance conditions.
2,532 share awards were granted under the DABS scheme in the year (2020: 19,593), vesting over three years to 9 June 2023. The DABS do not contain any IFRS 2 performance conditions.
The amount charged to the statement of profit or loss in the year was £1.1 million (2020: £0.6 million). A total charge of £0.9 million (2020: £1.4 million) previously recognised directly to equity for schemes which have now lapsed or vested was transferred from the share-based payments reserve to retained earnings during the period.
18. Loans and borrowings
19. Notes to the consolidated statement of cash flows
1 Items in the course of collection and settlement payables are included in this reconciliation on a net basis through the client cash line. The Directors have included these items on a net basis to best reflect the operating cash flows of the business.
20. Subsequent events Disposal of Romanian businessThe sale of the Romanian business, PayPoint Services SRL, to Innova Capital completed on 8 April 2021 following regulatory and other customary approvals. Cash proceeds of £48.3 million were received net of working capital adjustments. Since the sale completed after the end of the financial year, the assets and liabilities of the discontinued operation were classified as held for sale in the financial statements for the year ended 31 March 2021. The provisional gain on disposal is £29.6 million and will be presented in the financial statements for year ending 31 March 2022, as follows:
The gain on disposal of the discontinued operation is exempt from UK corporation tax under the substantial shareholding exemption.
Acquisition of RSM 2000On 12 April 2021 PayPoint acquired 100% of the share capital of RSM 2000 Limited for initial cash consideration of £5.9 million and deferred consideration of £1.0 million payable on the first anniversary of completion. The deferred consideration is not contingent on future performance. Beneficial ownership and control of RSM 2000 and consideration was transferred following regulatory approval. Acquisition costs incurred in the current financial year for RSM 2000 totalled £0.1 million, which are reported within exceptional items in profit or loss. The initial accounting of the business combination is yet to be finalised and therefore the allocation of the purchase price has not been disclosed.
1 Comparative information has been restated for the discontinued operation. Refer to note 9.2 Net revenue is an alternative performance measure. Refer to note 1 to the financial information for a reconciliation to revenue.3 Operating margin before exceptional items % is an alternative performance measure and is calculated by dividing operating profit before exceptional items by net revenue.4 Profit before tax from continuing operations includes £3.6 million of non-recurring costs associated with the acquisitions undertaken in the year and the £12.5 million provision made as a current best estimate for a resolution of Ofgem’s Statement of Objections5 Underlying profit before tax is an alternative performance measure as explained in note 1 to the financial information, a reconciliation to profit before tax from continuing operations is included in the Financial review on page 18.6 Cash generation is an alternative performance measure. Refer to the Financial review – cash flow and liquidity for a reconciliation from profit before tax.7 Net corporate (debt)/cash (excluding IFRS 16 liabilities) is an alternative performance measure. Refer to note 1 to the financial information for a reconciliation to cash and cash equivalents.8 Underlying total costs from continuing operations is an alternative performance measure as explained in note 1 to the financial statements, a reconciliation to costs is included in the Financial review on page 22.9 Net corporate (debt)/cash (excluding IFRS 16 liabilities) is an alternative performance measure. Refer to note 1 to the financial information for a reconciliation to cash and cash equivalents.10 Excludes the impact of British Gas contract not being renewed.11 PayPoint card payment business only12 PayPoint Consumer Research March 2021, 2k respondents, UK consumers13 https://www.lumina-intelligence.com/blog/convenience/lockdown-boosts-the-uk-convenience-retail-market-by-3-8bn14 PayPoint One Basket Data – Jan-Dec 202015 ACS Local Shop Report 202016 https://www.ukfinance.org.uk/system/files/Summary-UK-Payment-Markets-2018.pdf17 For the 12 months to June 2020. Analysis based on Cardnet UK Finance data for Miscellaneous Food stores, Off licences, Sweet Stores and Tobacconists, which form the majority of the Convenience store market.18 https://www.link.co.uk/media/1729/monthly-report-mar-21-final.pdf19 IMRG Valuing Home Delivery Review 202120 Metapack E-Commerce Delivery Benchmark Report 202121 https://www.imrg.org/uploads/media/default/0001/08/2477f50ad2fee946cdf5ed23ebb8df21f2489d09.pdf?st.22 OC&C analysis.23 https://www.ofgem.gov.uk/gas/retail-market/market-review-and-reform/implementation-cma-remedies/prepayment-meter-cap-level#:~:text=The%20Prepayment%20Meter%20Price%20Cap%20came%20into%20force,Price%20Cap%20expires%20at%20the%20end%20of%202020.24 https://www.ofgem.gov.uk/data-portal/retail-market-indicators25 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/968356/Q4_2020_Smart_Meters_Statistics_Reportv2.pdf26 https://www.statista.com/statistics/273608/number-of-prepaid-mobile-subscriber-in-the-united-kingdom-uk/27 https://www.accesstocash.org.uk/media/1087/final-report-final-web.pdf28 Comparative KPIs have been restated for the discontinued operation. Refer to note 9.29 Comparative information has been restated for the discontinued operation. Refer to note 9.30 Net revenue is an alternative performance measure. Refer to note 1 to the financial information for a reconciliation to revenue.31 Total costs is an alternative performance measure as explained in note 1 to the financial information, a reconciliation to costs is included in the Financial review on page 22.32 Underlying profit before tax from continuing operations is an alternative performance measure as explained in note 1 to the financial information. Refer to note 5 to the financial information for a reconciliation to profit before tax from continuing operations.33 Cash generation is an alternative performance measure. Refer to the Financial review – cash flow and liquidity on page 22 for a reconciliation from profit before tax.34 Net corporate debt (excluding IFRS 16 liabilities) is an alternative performance measure. Refer to note 1 to the financial information for a reconciliation to cash and cash equivalents.35 PayPoint One has replaced the legacy terminal in independent retailer partners.36 PPoS is a plug-in device and a virtual PayPoint terminal used on larger retailer partners’ own EPoS systems who wish to use PayPoint services.37 PayPoint card payments business only38 Comparative information has been restated for the discontinued operation. Refer to note 9.39 Comparative information has been restated for the discontinued operation. Refer to note 9.40 Operating margin before exceptional items % is an alternative performance measure and is calculated by dividing operating profit before exceptional items by net revenue.41 Effective tax rate is the tax cost as a percentage of profit before tax.42 Dividend cover represents profit after tax divided by reported dividends.43 Comparative information has been restated for the discontinued operation (note 9).
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