AFH Financial- Acquisitions

Share Price 276p

Mkt Cap £118m

Conflict Disclosure: No Holding

  • Acquisitions – Two are announced this morning. Mulberry IFA’s in Twickenham and AE Garment IFA’s in Hemel Hempstead. Combined max consideration is £7.2m.  Mulberry has 4 advisers and the consideration of £5.3m represents 3.1% of the £170m AUM.  Garment consideration of £1.9m represents4.2% of the £45m AUM.  The company updates that double digit inflows continue with low redemptions.
  • Estimates Not material to estimates. If we assumed (possibly heroic) the revenue yield on the AUM was 60bps that would be revenues of £1.3m which is 1.5% of the estimates revenue of AFH this year. IF this was the case the acquisition multiple would be 5.5X recurring revenue which is too high, so perhaps the AUM is a poor guide. 
  • Valuation The shares have fallen 25% since July and now trade on a PER of 13.3X and yield 3%. If we include the CULS the EV/Revenue is c 1.7X which is lower than it is possible to acquire companies for.
  • Conclusion The share price has behaved as if the issue of £15m 4% CULS in July implied the company has exhausted the pool of buyers of the ordinary shares. The CULS were issued at £5000 and currently trade at a discount (£4750).  The conversion price on the CULS is 420p, while the equity is now trading at 420p.  The worry is that with their acquisition currency now drying up the model could unravel. However,  I think the company may have reached sufficient scale now to generate cash flows which it can reinvest at c. 13% ROCE, as long as they don’t overpay.  The valuation looks opportunistically low if they haven’t overpaid today. On the disclosed information it is possible they have.

Gateley – Earn Out

Share Price 163p

Mkt Cap £181m

Conflict Disclosure: I hold

  • Earn Out – £1.25m is payable for deferred consideration on the 9 July 18 acquisition of Kiddy & Partners. This is calculated at 4.5X EBITDA. The statement says the aggregate maximum remaining payment outstanding is £365k. Which makes £850k paid at acquisition, £1.25m now and £365k outstanding, so a total of nearly £2.5m.  The consideration was capped at £3m for the period up to 2021 which I am therefore struggling to square with the commentary which says Kiddy has grown 37% ahead of original expectations.
  • Valuation PER 12.3X, Yield 5.3%
  • Conclusion The statement look a little more bullish than the numbers suggest.  The announcement also includes the wrong date of 9 July 2019 for the Kiddy acquisition which was in 2018. That’s OK but they are lawyers.  It’s cheap but not sure this is a positive announcement.

jeremy@charltonillingworth.co.uk