Unsurprisingly ahead of the bank holiday week end there is little news this morning. The Daily Note will be taking some time out over the next couple of weeks.
Private Client Consolidation
- Consolidation Will plentiful cheap credit, a weak pound and structural change the conditions are set for some overseas predators to help themselves. The latest declaration is the potential merger of Smith & Williamson and Tilney which could bring a significant challenger to Rathbone and Brewin with £45bn AUM. I had a look at the accounts of Tilney yesterday. They make 38% EBITDA margins while having £380m debt on the balance sheet and negative net tangible assets, the hallmarks of private equity while their average client portfolio is close to a third of the average client size of Brewin and Rathbone. See stats below:
|Tilney||Smith & Williamson||Brewin||Rathbone IM|
|Year End||Dec 18||April 18||Sept 18||Dec 18|
|Adjusted EBITDA £m||87.4||49.41||83.1||78.8|
|Staff Costs £m||88.1||157.5||174.8||104.2|
|Net inflows p.a||2.50%||2.80%||3.70%||3.40%|
|Average head count||1133||1722||1763||1296|
|Revenue yield on avg. AUM||97.4||132.6||79.3||76.3|
|Net debt||345.1||280m NAV||274m NAV||464.1m NAV|
|Staff cost/head (£)||77,700||91,480||99,149||80,401|
|Staff cost/other costs (%)||49.7%||72.3%||69.3%||53.0%|
- Valuations The price of the Smith & Williamson transaction will be interesting. Brewin trades on a PER of 15.1 and yields 5.4% while Rathbone trades on a PER of 16.4 and yields 3%/ EV/AUM is 1.9% for Brewin and 2.6% for Rathbone.
- Conclusion An aggressive private equity beast prowling the mature wealth management world may be uncomfortable. It is possible it may force Brewin and Rathbone to acquire or be acquired. With Brewin shares down 18% over the last 12 months and Rathbones down 14% it certainly makes the shares look attractive.
- Regulatory contagion was confirmed yesterday with the Australian regulator proposing new rules very similar to those that ESMA introduced this year causing significant loss of revenues for the spreadbetting companies. IG Group stated it would make no difference to their 3-5% underlying growth guidance. Plus 500 stated that Australia represented 15% of their CFD trade while CMC stated it was 17% on their net operating income.
- Estimates CMC managed to slip into their statement that current trading is ahead of expectations. The recent director purchases of Plus 500 also add confidence.
- Valuations Plus 500 trades on a PER of 7.1X and yields 8.5%, while CMC trades on 12.2X and yields 4.5% while IG Group ( which I hold) trades on 13.7X and yields 8%.PER is 15.3X falling to 12.8X after bank application costs or 10.6X falling to 9.3X before bank application costs. July NAV is forecast to be £14.9m so this is a 7% premium to book value.
- Conclusion Plus 500 and IG are aiming for market share gain in this new environment. This may not be good for next year’s profitability but humans will continue to bet and these companies will emerge stronger in the medium term as they build new products and gain market share.