Germany launched a 30 year bond with no interest payments at all. If
someone offers you nothing in return for the loan of your money its hard to
have a mindset that goes “Great thankyou”. But that’s called fixed income
“investing” now. Perhaps all those equity investing words we grew up with
like “growth rate” and “payout ratio” need replacing with words like
“volatility” and “multi factor risk”.
Funding Group – Pre Close Update
Disclosure: I am a consultant
The company has had a sound year. Lending volumes ar up
6.4% and the loan book at the year end up 4.5%. They also announce they
intend to re submit their banking license application having looked at an
acquisition and decided against it, as Paragon once did. The bank
application costs for last year are therefore expected to be lower than
anticipated. The ex CFO of Heritable Bank Plc is appointed to the board.
House broker forecasts before bank application costs
are 7.2p EPS and after bank application costs are 4.96p for July 19. This
grows to 8.2p and 5.95p for the year to July 2020.
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.
This high quality loan book is growing modestly. When growth
accelerates the price will be very different. The company is investing in
the infrastructure to accelerate the growth.
& Quilter – New Program Partnerships
Disclosure I Hold
The company announces two new program management
partnerships for Paragon where they will provide licenses and capacity for
Paragon in New York specialist commercial transport. Also a UK MGA, Sophro
will use R&Q to provide after the event insurance, while the existing
First Underwriting MGA has extended its program partnership. There are no
specific numbers attached to these but the statement says the company
expects a “significant uplift in 2019 to the $500m of GWP premium
underwritten in 2018 and the pipeline of program opportunities continues
Last year’s PBT of £14.3m had no contribution from the
program business, while this year’s £41.6m PBT estimate is largely driven
by the significant number of book transfer deals. The program business
is more highly rateable as it is recurring, capital light and high
ROCE. If we impute,say a 4% margin on the GWP run rate of $500m, we
can get a number of $20m which is high margin.
PER is 8.6X, Yield 5.9%
The market has been spooked by the sale of shares
around 180p by the CEO. The program business is the area that will
be the future and this encouraging update suggests there is plenty of
upside as it builds.
looks like its emerging after a small market temper. These two companies
have interesting valuations.
– Private Equity Deals
Disclosure: No Holding
KPMG’s report yesterday that H1 PE deals were 35% below
the prior year seems strangely encouraging to me. The volume of deals was
384, down from 594 while the value declined 40% to £28.5bn. The TMT sector
accounted for 66% of the value of the deals. The slowdown was reported to
be something to do with Europe. 2 Conclusions If PE funds are sitting on
their hands until after October with value now beginning to emerge we
could have a surprising number of deals at the back end of the year which
would help markets. But it is a concern for K3Capital. Specialising
in deals at the smaller end where the slowdown is sharpest wont help them.
The 5 June trading update for the year to May said the
company expected results to be at the upper end of forecasts which are for
a 38% reduction in PBT to £4.5m. Results are due on 17 September. An
increase to £7.5m PBT is expected in the year to May 2020.
The shares trade on 10X the forecast to May 2020 and yield above 10%.
|This looks like a case of the KPMG report lagging the reality that was
reflected in K3C forecasts a while ago and if we do get an uptick post
that Europe thingy this could be a useful time to pick up these shares.
Standard Finance – H1 Results
Disclosure No Holding
Revenue up 12% to £88.3m and normalised PBT up 12% to
£6.3m. Exceptional costs of £12.7m for the PFG bid and £12.5m goodwill
impairment on Loans at Home. Loan book up 26% to £335.6m driven by 22%
growth in Branch-based, 53% in Guaranto and a 6% reduction in Home Credit.
Revenue yields declines modestly while impairments declined modestly
on H2 last year driven by an improvement in the Home Credit book. Cost
income ratio also declined in all three businesses and now runs at 45.3%
in Branch-based, 44.3% in Guarantor and 56.3% in Home Credit.
Outlook says trading is in line with expectations and the group is well
The forecasts I can see look for £22.7m adjusted PBT
for the year which assumes a large delta into H2 given £6.3m in H1. The
company has hired 70 staff in everyday loans and opened 7 new branches
which are anticipated to deliver an uptick in H2.
PER 5.8X and yield 9.2% is an appealing traditional valuation. ROE
underlying this year is expected to be 14% while the NAV is 67p/share,
twice the current share price although the tangible NAV is 18p/share. Of
course writing down the goodwill will improve the ROE going forward
These shares are now extremely cheap while the results
are now improving. With the founder incentive plan maturing in March 2020
and the business improving the company would be vulnerable. There aren’t
many acquirers given the regulated nature of the business but private
equity may have a look.
500 announces more director purchases this morning. Their
advertising is all over my facebook page. Just wonder if they are doing
rather well at the moment.
Last week Octopus entered the platform market acquiring start up Seccl,
which provides a white label platform for IFA’s, for £10m. This equates to
c. £100% of AUM which certainly brings tears to the eyes. Lets not do the
read across to Nucleus, AJ Bell etc.
the retail platform space the Yodelar review of Nutmeg makes painful
reading. They conclude that their poor returns and lack of competitive
investment options means they just don’t appeal to consumers. Just after
Investec wrote off £20m closing their robo and OBS has closed their Robo
this year, SmartWealth
are in talks to acquire Smith & Williamson. Tilney has £24bn and Smith
& Williamson £21bn AUM. This would make it a large competitor to
Brewin and Rathbone who have £44bn and £49bn AUM each. Potentially this
could introduce more competition for these two companies that
produce reliable good margins. The Sunday Times referred to them as
The EV/AUM is on the vertical axis and the number of bps of AUM that drops
into profit is on the horizontal access below.
The pressure is on Rathbone. Costs are increasing under a new CEO who is
yet to produce a new strategy while the valuation relative to it strong
profitability is full. We get a strategy update in October.
Disclosure I Hold
Last week Oakley Capital acquired a majority stake in
Seven Miles, a German company founded 5 years ago in the gift voucher
space. It is expected to sell gift solutions in excess of Euro 100m this
year. By way of read across Park Group did £426m of billings last year so
more than 4X the size and £116m mkt cap. So a majority stake would cost
twice as much. There is plenty of headroom between quoted company
valuations and many private company valuations.
Park trades at a PER of 12 and yields 5.1%
Park Group is yet to reveal its mysterious new
product. If it was ever to become a growth stock there is valuation
and earnings upside. Or it could get consolidated where there is plenty of
upside. The patient investor may benefit
A level results out today may cause some drama – which may be useful given
the prophets of doom are likely to be out in force with yield curves in
both UK and US inverting for the first time since the financial crisis
predicting ever lower rates and recession. The same day that We Work’s IPO
document landed on desks informing us the founder has a line of credit of
$500m secured by a pledge against his shares and the $1.9bn of losses last
year are very “cost efficient”.
History Perhaps we have been here before. There are parallels with the the 1680’s when the war with France led us to have quite a bit of debt so deflationary policies were pursued in the 1680’s. Today we call it QE but back then the government confessed to “finding” some currency in a vault that hadn’t previously been in circulation. The result was some wild speculation in wreck salvaging companies and other new technologies such as the “Company for the Sucking Worm Engine” which aimed to produce a fire engine. My favourite was a company which listed in order to “drain the red sea to recover the gold abandoned by the Egyptians after the crossing of the Jews”. Eventually the Bank of England was formed to deal with the debt shortly before it all came to an end.
The net result of that debt bubble was a law being passed in 1697 to
“refrain the number and ill practices of brokers and stock jobbers”. Their
number was restricted to 100. We had another Act to regulate markets after
the South Sea Bubble in 1734 and the SEC Act in 1929. Post the GFC we had
the Dodd-Frank Act.
It is possible the yield curve is predicting deflation rather than
recession. Neither are fun. The likely outcome is some new legislation
after the speculative bubble unwinds. In the meantime it is possible that
fundamentals may make a return to fashion. I wonder if we will remember
the word “Fintech” in 10 years-time.
500 director share purchases
Exposure has a new Chief Strategy Officer out of Lloyds Bank
Bank – H1 Results
Disclosure: No Holding
Underlying net profit up 19% to GEL 258m from a loan
book up 25.2% year on year to GEL 11.1bn. ROE 22.7% from ROA of 3.3%. NIM
was 5.8% and impairments were down (as they were at BGEO) from 1.6% to
1.3% while the cost income ratio was a little higher at 37.9%. Tier 1
ratio was 12.4%, against a requirement of 11.9%. The outlook is positive
with accelerating economic growth expected.
Full year estimates anticipate 14% EPS growth which
looks undemanding given H1 numbers. Could be scope for upgrades
Dec 19 PER 5.2X Yield 5.5%. Price/Book 1.1X for 22.7%
The shares are down 23% since June. Sometimes it pays to be greedy
when others are fearful.
recently found myself wondering if this low interest rate environment
means economic cycles that we have loved and feared are now a thing of the
past and the economy is more like a drunk stumbling along the pavement.
And therefore maybe the underperformance of value is actually correct as
the only growth is structural rather than cyclical. Until the graph below
reminded me that these thoughts happen at the moment of capitulation. It
may well be time for the pain trade of buying value.
are some very deep value stocks out there. I would point out a few
contenders in the car boot sale:
– PER 7.2, Yield 5.2%
Group – Price/NTAV 0.2
-PER 9.2, Yield 6.6%
Dadds-PER 7.5, Yield 5.3%
– PER 6.7, Yield 7.9%
Global -PER 5.3, Yield 7.2%
-PER 3, Yield 13.2%
of Georgia- PER 4.8, Yield 6.1%
500 – PER 2.5, Yield
-PER 8, Yield 6.2%
of Georgia – H1 Results
Disclosure: No Holding
PBT up 8.8% to GEL 223.4m which equates to a ROAE of
23.7%. Impairment charge reduced from 1.7$ to 1.5%. Loan book growth was
19% in constant currency, 30% reported currency, while the Tier 1 capital
adequacy was 13.3%, compared to a requirement of 11.6%. Outlook is well
placed to deliver strong growth over the coming years.
Full year estimates look for GEL 502m PBT, which looks
reasonable in the light of GEL 223m in H1
PER 4.8, Yield 6%. Price/Book is 1.2 and the bank has
just delivered 23% ROAE
The shares are down 24% since May and these are stellar results. Unless
there is a Russian invasion imminent the force of gravity on the share
price will reverse.