Anticipated business development
Over the course of the coming years, we generally expect to see an increased need for consulting services in the field of professional wealth management among all of the Group's target client groups. More and more clients of MLP Banking AG are approaching the age at which financial investments become significantly more important to them, not least due to their increasing personal wealth. Above all, we see significant growth opportunities through the massive potential of this consulting area among our client base at MLP. At FERI, we are continuing to benefit from the comprehensive expertise in alternative forms of investment. In light of low interest rates, the ongoing debt crisis and geopolitical risks, the capital market environment is likely to be characterised by pronounced volatility and remain challenging in the 2018 financial year. It is therefore safe to assume that both private and institutional investors will continue to display risk-averse behaviour. Volume- and performance-based remuneration could also decline.
In an unchanged market situation with no radical events or similar effects on capital markets, we are anticipating a slightly better performance than in the previous year in the wealth management area for 2018 in terms of both revenue and assets under management – driven by FERI, yet crucially also by MLP's private client business.
In the old-age provision area, MLP expects the reservations displayed when it comes to signing long-term provision contracts to continue throughout the market, primarily due to the ongoing period of low interest rates. These are driving changes in the product landscape of the old-age provision area. Alternative guarantee concepts are enjoying ever increasing demand and gaining ground throughout the market. MLP has taken on a pioneering role in the brokerage of these concepts and we are increasingly benefiting from this. The entry into force of the German legislation to strengthen occupational pension provision in 2018 is likely to provide positive stimulus for the occupational pension provision area. In the field of old-age provision, we are anticipating a significant increase in new business in 2018, while revenues are expected to increase slightly.
For the non-life insurance business, we see growth potential in both the private and commercial sectors. Following the successful introduction of pooling concepts for MLP, as well as the physician policy (special inventory policy), further target group concepts which also contain a module to safeguard against hacker attacks (cyber insurance) are planned at DOMCURA for 2018. These are, in particular, aimed at office-based operations and professional advisers.
We are keen to further extend the interaction between MLP and DOMCURA, while at the same time growing the overall portfolio at MLP. To this end, we are establishing a process that will make it easier for us to incorporate existing non-life insurance policies of our clients that have not already been brokered via MLP into our portfolio. Overall, we therefore expect a slight increase in revenue in the non-life insurance area for 2018.
In the health insurance area, market conditions are unlikely to improve in the short term, as the concept of comprehensive private insurance is continually being called into question by some politicians and in the media. The notion of a "citizens insurance" and increased premiums are the main aspects of the discussion that are continuing to unsettle German citizens here. Indeed, the introduction of a "citizens insurance" continues to be discussed in public while attempts to form a new government are underway. However, the additional premiums for the statutory health insurance system could increase willingness among those paying into the statutory health insurance system to make the switch to a private policy in the medium term – which applies to MLP clients, in particular, as they generally enjoy above-average incomes. The private supplementary insurance business holds growth potential too. We also believe that the occupational health insurance area has a promising future. Overall, we expect revenues in the field of health insurance in 2018 to be at the previous year's level.
Within the scope of a holistic investment strategy, material assets in the form of real estate offer an attractive investment option, particularly for MLP's target group. We are keen to continuously expand our brokerage activities for new and concept-driven properties in future as a way of establishing a broader revenue basis for our advisory services. For 2018, we are expecting the brokered volume of business in the loans and mortgages area to remain at the same high level recorded in the previous year. In terms of real estate brokerage, we are anticipating a volume slightly above the previous year's level, although revenue is likely to remain at the same level as the previous year.
In our lending business we are also anticipating a positive development in terms of financing volume as well as in terms of revenues. The partnership between MLP Banking AG and Interhyp AG is new. MLP Banking AG is appearing as a product partner on this loan brokerage platform for the first time.
However, a degree of uncertainty remains in all consulting areas due to the overall challenging market environment.
Revenue estimates: 2018 (in comparison with the previous year)
Strategic restructuring accelerated
In order to also maintain this earnings level in spite of the ongoing difficult market conditions in the field of old-age provision, MLP will further accelerate the strategic further development of the previous years. Initiated and successful growth activities will be continued to this end.
Further acquisitions possible
Consolidation is taking place in the market of MLP Finanzberatung SE's line of business. Horizontal acquisitions are to be reviewed in detail, as the structure and culture of these companies must suit MLP. Alongside this, there are also opportunities for vertical acquisitions, i.e. for extending or strengthening the value-added chain, in the business segment of MLP Finanzberatung SE. Acquisitions and joint ventures are generally also possible in the markets of FERI and DOMCURA, facilitating profitable inorganic growth and strengthening of the business models.
Digitalisation remains in focus
The MLP Group supports its business model to a large extent with digital offers and will continue to consistently expand this support. In this vein, we are working step-by-step on the following objective:
MLP also strives to be the dialogue partner for all financial matters on the web and on social media. Based on their requirements and interests, existing and prospective clients are offered useful information and dialogue opportunities, as well as online products and tools. These channels are also used to win prospects and new clients for MLP. The offer for young people comes together under the name MLP financify. The portal allows everyone to experience the benefits of MLP in the digital world around the clock. Clients can find all personal finance topics, such as policies, accounts and overviews of in and outgoings, in an app. All information is presented clearly and transparently for effective use. To supplement this, clients receive news and optimisation suggestions tailored to their requirements. There is always an option to get in contact or reconnect with their personal MLP consultant, customer service or both – depending on the respective client's wishes.
Building upon previous activities we are targeting further establishing and increasing online policy sales as a way of winning new clients in 2018. E-mail marketing measures are also planned as a way of turning prospects into actual clients. In addition we intend to expand our presence on social media pages such as Facebook with a chatbot, which is currently in the testing phase, and will open up the e-signature for further products in 2018.
Online client portal being extended
As of 2018 our MLP client portal will be upgraded to include a contract overview of all insurance policies.
Within the scope of our digitalisation strategy, we will be introducing a new telephone system over the course of 2018. This will also make it easier to get in touch with consultants via app and smartphone. In addition to this, the step-by-step roll-out of a new electronic client file will take place early in 2018.
Number of prospective clients constantly on the rise
The continuous increase in the number of persons with academic qualifications in gainful employment is pleasing for MLP in terms of client potential. This trend is likely to continue over the course of the next few years, as the unemployment rate among academics is at a very low level. However, this presents a challenge in terms of recruiting new consultants for MLP. The competition for graduates has intensified in the last few years, and good graduates typically have a choice between several attractive career entry offers. In 2018, we will once again strengthen activities to recruit new consultants - an area we are keen to significantly expand with the realignment of our university segment.
Realignment of the university segment at MLP
Our aim is to increase our presence at universities over the course of the next few years. By pooling all of MLP's cross-location activities in the university segment, we established all necessary prerequisites for this in the reporting year. The objective of this realignment of our university segment is to win over more new clients and young consultants. We feel confident that young consultants will find ideal prerequisites in this new model. Firstly, we have optimised the training and qualification offers for this group of consultants. Secondly, the young consultants also have successful and experienced consultants at their side in the form of the university team leaders, whose focus is mainly aimed at training new consultants in the university segment. On the basis of the success enjoyed by these measures to date, we will intensify our investment in this area and its growth in the coming year. With these greater investments, we will create the basis for stronger future growth in terms of consultants, revenue and income.
In this context, we will continue to expand our recruiting activities through our online and social media presences. We are anticipating a slight net increase in our number of consultants for 2018. Our overall assessment is based on the fact that annual employee turnover will not exceed the target limit of around 10.0%.
We believe that the high quality of our basic and further training programme will continue to be the key to success. Indeed, we offer our consultants a programme that exceeds the legally stipulated level. This should help us increase the number of central training days (including online seminars) at our Corporate University slightly compared with the last financial year. This also applies to the total budget for qualifications and further training.
Administration costs stable
MLP has been implementing additional extensive efficiency measures since 2016 in order to further reduce the cost base significantly in the financial year 2017 and subsequent years. We consider the level that has now been reached to provide the basis in the coming years for a consistent cost management.
We will continue to develop and optimise MLP in 2018. The forecast administration costs therefore still include expenses for investments in the future, in particular for recruiting young consultants within the scope of strengthening the university segment. Expenses incurred in this connection in 2017 were around € 3.6 million. On the basis of the successes already achieved in 2017, we are keen to continue driving forward this approach in 2018 and further intensify our investments in strengthening the university segment. We are anticipating expenses of around € 7 million for this in 2018. In addition there will be higher training expenses in the light of rising consultant numbers. Although this may limit our growth in earnings in the short term, it will greatly increase our future profit potential in the long term. Added to this are further investments, in particular in IT, which are largely necessary for further implementation of our digitalisation strategy.
Alongside administration expenses, the cost of sales (primarily commission expenses) are also relevant for our cost structure. Since 2015, MLP has been offering a training allowance for new client consultants to support them in their start to self-employment. These costs are also recognised under commissions paid. In 2018, we expect to record a comparable overall ratio of commission income to commissions paid as in the reporting year.
We also expect loan loss provisions to remain at the previous year's level.
Forecast: Significant increase in EBIT anticipated
Based on our expected revenues and costs, we are anticipating a significant increase in EBIT for the financial year 2018 over the previous year. In 2017, one-off expenses of € 9.1 million for further optimising the corporate structure had a negative impact on EBIT. Compared with the previous year's operating EBIT, i.e. excluding the one-off expenses described above, we are anticipating stable development – despite operating in markets that remain challenging and comprehensive investments in our future.
This forecast is based on the assumption that the framework conditions in our core markets will not become significantly worse.
As was already the case in the previous year, we once again expect the finance cost to be slightly negative. The tax rate in 2017 was 23.6%. For 2018, we are anticipating a higher tax rate.
Dividends of € 0.20 per share
As a general rule, our dividend policy is aligned to the respective financial and earnings position, as well as the company's future liquidity requirements. Since MLP employs a comparatively low capital-intensive business model, we intend to maintain an attractive and consistent dividend policy for the future. At the same time, we will retain a portion of profit to further strengthen the business model. Set against this background, we have been paying out between 50% and 70% of Group net profit as dividends since the financial year 2014.
As a result of further optimising the corporate structure, free equity capital increased to around € 290.0 million at the end of the 2017. At the same time, one-off expenses of € 9.1 million were accrued in this connection. MLP has announced that it will compensate these one-off expenses for the shareholders and base its dividend distribution on operating net profit. On this basis, the Executive Board and Supervisory Board will propose a dividend of € 0.20 per share to the Annual General Meeting on June 14, 2018. The distribution rate is around 64% of operating net profit. We are keen to continue paying out between 50% and 70% of Group net profit in future.
Planned financing activities and investments
The MLP Group held sufficient shareholders' equity and cash holdings as of the balance sheet date. Our business model is not very capital intensive and generates high cash flows. From today's perspective, this provides sufficient internal financing capacity for the forecast period. This therefore makes us largely non-reliant on developments in the capital markets. Even increasing interest rates or more restrictive issuing of loans by banks would not have a negative effect on our financing options or liquidity. We will use our cash flow to allow shareholders to participate in the company's success, to strengthen the Group's financial power and for investments.
Our investment volume was € 7.3 million in the last financial year, whereby the focus remained on IT. You can find more detailed information on this in the chapter entitled "Economic report – Business performance". We will continue to invest, above all in our IT systems. This essentially focuses on further implementing our digitalisation strategy, for which we are estimating an investment volume of around € 30 million over the next three years. In concrete terms this means that we expect to invest around the same volume in 2018 as in the previous year. Within our projects, we use further funds that will flow directly into our income statement as expenses. We expect to be able to finance all investments from cash flow.
Significant increase in return on equity anticipated
Return on equity increased from 3.8% to 7.3% in the financial year 2017. The previous year was essentially burdened by higher one-off expenses, which were accrued within the scope of our efficiency measures. However, we are anticipating a significant increase in return on equity for 2018.
The Group's liquidity rose from € 265 million to around € 354 million in the financial year 2017. However, the overall liquidity situation remains good. Liquidity will be reduced by the intended dividend payment of € 21.9 million for the financial year 2017. It will increase again in the second half of 2018 thanks to the typical year-end business. Acquisitions which we finance with cash holdings would also have a negative effect on the Group's liquidity and capital adequacy. We are not anticipating any liquidity squeezes for the coming financial year.
General statement by corporate management on the expected development of the Group
MLP anticipates that the challenging market conditions will continue throughout the financial year 2018. Against a backdrop of the successfully implemented efficiency measures and the elimination of one-off expenses, we expect EBIT to be significantly higher in 2018 than in 2017 and also expect operating EBIT to be at the same level recorded in 2017. With regard to total revenue, we are anticipating a stable to slightly upward development. We therefore expect to see a positive overall development within the Group. We enjoy a sound financial standing, which we are keen to use to further extend our strong market position.
This documentation includes certain prognoses and information on future developments founded on the conviction of MLP SE's Executive Board, as well as on assumptions and information currently available to MLP SE. Terms such as "expect", "anticipate", "estimate", "assume", "intend", "plan", "should", "could", "might", "project" and any other phrases used in reference to the company describe prognoses based on certain factors subject to uncertainty.
Many factors can contribute to the actual results of the MLP Group differing significantly from the prognoses made in such statements.
MLP SE accepts no liability to the general public for updating or correcting prognoses. All prognoses and predictions are subject to various risks and uncertainties, which can lead to the actual results differing from expectations. The prognoses reflect the points of view at the time when they were made.