Yesterday 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”.

Orchard Funding Group – Pre Close Update 

Share Price 76p

Mkt Cap £16m

Conflict Disclosure: I am a consultant

  • Update  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.
  • Estimates 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.
  • Valuation 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 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.

Randall & Quilter – New Program Partnerships

Share Price 158p

Mkt Cap £310m

Conflict Disclosure I Hold

  • Partnerships 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 to grow.
  • Estimates 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. 
  • Valuation PER is 8.6X, Yield 5.9%
  • Conclusion 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.

jeremy@charltonillingworth.co.uk

Value now looks like its emerging after a small market temper.  These two companies have interesting valuations.

K3Capital – Private Equity Deals 

Share Price 141p

Mkt Cap £60m

Conflict Disclosure: No Holding

  • Report 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.
  • Estimates 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.
  • Valuation The shares trade on 10X the forecast to May 2020 and yield above 10%.
  • Conclusion |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.

Non Standard Finance – H1 Results 

Share Price 33p

Mkt Cap £105m

Conflict Disclosure No Holding

  • Results 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 placed.
  • Estimates 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.
  • Valuation 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
  • Conclusion 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.

jeremy@charltonillingworth.co.uk

News

  • Plus 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.
  • Platforms 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.
  • Meanwhile in 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

Wealth Manager Consolidation

  • Tilney 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 “mature” businesses.
  • Valuation  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.
  • Conclusion 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.

Park Group

Share Price 62p

Mkt Cap £116m

Conflict Disclosure I Hold

  • Consolidation 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.
  • Valuation Park trades at a PER of 12 and yields 5.1%
  • Conclusion 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

jeremy@charltonillingworth.co.uk

  • Today 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.
  • Results 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. 
  • Conclusion 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.

News:

  • Plus 500 director share purchases
  • Urban Exposure has a new Chief Strategy Officer out of Lloyds Bank

TBC Bank – H1 Results

Share Price 1322p

Mkt Cap £727m

Conflict Disclosure: No Holding

  • Results 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.
  • Estimates Full year estimates anticipate 14% EPS growth which looks undemanding given H1 numbers. Could be scope for upgrades
  • Valuation Dec 19 PER 5.2X Yield 5.5%. Price/Book 1.1X for 22.7% ROE
  • Conclusion The shares are down 23% since June.  Sometimes it pays to be greedy when others are fearful.

jeremy@charltonillingworth.co.uk

Value

  • I have 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.
  • And there are some very deep value stocks out there. I would point out a few contenders in the car boot sale:
  • STM                – PER 7.2, Yield 5.2%
  • Just Group      – Price/NTAV 0.2
  • MorsesClub     -PER 9.2, Yield 6.6%
  • Miton               -EV/AUM 0.9%
  • Gordon Dadds-PER 7.5, Yield 5.3%
  • Amigo              – PER 6.7, Yield 7.9%
  • Arrow Global   -PER 5.3, Yield 7.2%
  • IPF                  -PER 3, Yield 13.2%
  • Bank of Georgia- PER 4.8, Yield 6.1%
  • Plus 500          – PER 2.5, Yield 9.6%
  • TPICAP           -PER 8, Yield 6.2%

Bank of Georgia – H1 Results

Share Price 1346p

Mkt Cap £644m

Conflict Disclosure: No Holding

  • Results  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.
  • Estimates Full year estimates look for GEL 502m PBT, which looks reasonable in the light of GEL 223m in H1
  • Valuation PER 4.8, Yield 6%. Price/Book is 1.2 and the bank has just delivered 23% ROAE
  • Conclusion 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.

jeremy@charltonillingworth.co.uk