• Remuneration In the midst of AGM season it seems the fund managers are calling out their own.  42% voted against SLE’s remuneration report. 25% voted against Schroders.  While 33% voted against Amundi’s CEO pay. 
  • PFG M&G publishes a letter of support for Provident following Schroders recent letter of support
  • Kingswood Holdings, the £15m market cap wealth manager is going global with a stake in a US firm and a strategic partnership
  • Ramsdens acquires another 4 stores for £0.5m from the money shop. Due to rebranding costs they wont contribute until 2021 when the are anticipated to produce a contribution of £0.3m.  Good price. PER 9X  the same as most sub prime lenders at the moment,

Mortgage Advice Bureau – Volumes

Share Price 597p

Mkt Cap £307m

Conflict disclosure – No holding

  • Mortgage approval numbers are due out today. Of course this doesn’t cover the transfer market which is about 38% of the total mortgage market where over the last 2 years there has been a huge switch from 2 year fixed loans to 5 year fixes. From what I can tell it would appear that there has been around a 20-30% switch in the volumes of new mortgages moving from 2 year to 5 year fixes over the last 2 years. Which of course will cause a slowing in the market as the 2 year renewals now take longer to renew. Coupled with the longer time it takes for property transactions to occur it may be there are yet further downgrades to come for Mortgage advice bureau.
  • Estimates Forecasts in the year to December 2019 are for 10% revenue growth which in the context of a 15% increase in appointed representatives may look reasonable. However, with a consensus of a 25.7p dividend and 28.3p of EPS any further downgrade could cause the market to worry about the dividend
  • Valuation PER 19.9X and yield 4.6%
  • Conclusion  There are a number of headwinds and over the next 6 months the pressure on forecasts may be on the downside. Its hard to get too negative in the context of 15% market share gains but this looks unlikely to improve over the next 6 months.

Amigo Holdings – FY Results

Share Price215p

Mkt Cap £1.02bn

Conflict Disclosure : No holding

  • Results Customer numbers up 23% year to March and loan book up 17.4% to £707m. Revenue was up 28% to £271m while the impairments increased from 21.3% to 23.7%. Cost income ratio reduced from 21.9% to 17.5% delivering £100.1m PBT. EPS up 21.5% to 22p. Net debt /tangible equity 1.9X. ROE is 36%. Yes 36%. Outlook “cautiously optimistic”.
  • Estimates Results are modestly ahead of expectations. Going forward estimates are based off 17% revenue growth with improving margins.
  • Valuation PER 8.7X.  Yield 4.5%. Price/Book value 4.2X for 36% ROE.
  • Conclusion If this performance is sustainable the shares are wrongly priced. The returns do amount to super profits but with a market leading position in an emerging area the competitive threats look modest as does the regulatory threat.  At worst we may expect the shares to grow in line with profits but at some point a re rating should be expected too. The shares are down 29% over 12 months. .

AFH Holdings  – H1 Results

Share Price 311p

Mkt Cap £133m

Conflict Disclosure: No holding

  • Update Revenue up 61% to £36.6m and underlying EBITDA up 74% to £7.7m representing a 21% margin.  PBT up 80% to £4.5m.  Statutory EPS up 56% to 10.7p and Adjusted EPR up 49% to 14.87p. The outlook views the future with confidence. Net cash is £7.7m
  • Estimates Full year revenue estimate is £79.3m, of which 46% has been delivered in H1, resulting in 100% EPS growth for the year to 30.5p. A modest 8.5p dividend is expected.
  • Valuation   PER 9.3X  Yield 3%. The 3 year aspirational target of £10bn AUM, Revenue of £140m and EBITDA margin of 25%. That’s £35m EBITDA. If the company can do that without resorting to shareholders the multiple of EBITDA would be 3.8X.
  • Conclusion I have trawled through the acquisition history and it seems remarkably flawless. I find myself wondering if the cross selling of protection products to acquired companies is the magic ingredient.  In any event the shares are down 8% year to date against an improving market which represents an opportunity in a very cheap stock.

jeremy@charltonillingworth.co.uk

AJ Bell – H1 Results

Share Price431p

Mkt Cap £1.76bn

Conflict Disclosure : No holding

  • Results Revenue up 17% to £50.1m PBT up 27% to £17.7m.  PBT margin 35.3%. Customer numbers up 9% to 214853 and AUA up 3% to £47.7bn. Outlook is confident
  • Estimates anticipate 20% EPS growth for the year
  • Valuation The company IPO’s in December at 160p and is now 431p per share putting it on a PER of 53 and yield of 1.2%
  • Conclusion Undoubtedly a high quality situation where misallocation of cheap capital is causing a squash in the doorway market “quality”. Having IPO’d at a valuation of £650m and 5 months later being valued at £1.76bn I have got vertigo.

Gateley Holdings  – Pre Close Update

Share Price 170p

Mkt Cap £188m

Conflict Disclosure: I hold

  • Update Revenue is described as “strong”. Revenue expected to be £102m and adjusted EBITDA £19m with PAT of £13m. Results announced on 16 July.
  • Estimates While the results are described as strong they appear to be in line with expectations which is 15% EPS growth. This fades to 8% EPS growth forecast for the year just started.
  • Valuation   PER 12X  Yield 5%.
  • Conclusion I was attracted to this one as it seem safer than some in a sector where it is difficult to trust the concept of lawyers allowing shareholders to derive some benefit. With acquisitions being available at such low prices I suspect more aggressive businesses may do better in the short term.

Tungsten – FY Trading Update

Share Price 38p

Mkt Cap £48m

Conflict Disclosure : No holding

  • Update Revenue to April 2019 is up 7% to £36m and a positive EBITDA is reported for the first time of £0.6m. Cash is £2.8m and transaction volumes grew modestly by 3%. The search for a new CEO is ongoing.
  • Estimates While the revenue for the year is in line with expectations the EBITDA expectation was £0.5m. Going forward forecasts anticipate £4.5m EBITDA in the year ahead. With £2.5m achieved last year on an underlying basis this looks very achievable.
  • Valuation 1.3X revenue suggests the market is not anticipating a sustainable business which is understandable given the lack of CEO.  However this platform has the ability to be highly rated if the high quality customer list can be better monetised.
  • Conclusion This company has huge IP and consequently potential upside. With a modest valuation it may well get bid approaches or the new CEO may re energise the business. Both are good for shareholders. If it made a 30% operating margin it would be reasonable to expect it to trade at 3X revenue which is more than double the current share price.

S&U – AGM update

Share Price 2220p

Mkt Cap £267m

Conflict disclosure No holding

  • Update Advantage motor finance loan book up 3% to £263m while impairment has shown a modest improvement from the year end to 25%. Demand remains strong while underwriting has been tightened. Aspen Bridging is now a £22m loan book. Borrowing are at £114m against facilities of £160m
  • Estimates Anticipates 6% EPS growth to January 2020.
  • Valuation PER 9X Yield 5.7%. Price/Book 1.62X and ROE 14%
  • Conclusion These shares are very cheap as the market has been waiting for the new car cycle to impact impairments at S&U with the traditional 2 year time lag.  The reduction in impairmnents today is therefore hugely encouraging and these shares will bounce.  I think the rabbit is showing his ears out of the hat.

jeremy@charltonillingworth.co.uk

News

  • Gresham House announces another mandate win for its forestry division. 4k hectares of Irish forestry adds 3% to their total acreage managed.  Forestry accounts for 48% of Gresham’s AUM but less of revenue. Note that Liberum forecasts are predicated on flat AUM over 2019. A full note is available to subscribers.
  • Randall & Quilter Alan Quilter sold 500k shares on Monday at 188p per share which is 13% of his total shareholding in the company
  • Charles Stanley News arrives that Charles Stanley has started charging £420 p.a for clients to maintain their own Crest account. Signs of progress towards that elusive 15% operating margin target

Intermediate Capital Group – FY Results

Share Price1197p

Mkt Cap £3.48bn

Conflict Disclosure : No holding

  • Results AUM up 29% to E37.1bn on the back of E10bn on new money raised.  Third party AUM up 41% over the year to E29.6bn. Fund management profits up 51% to £143.8m and group PBT up 65% to £278.3m. EPS 63.4p made up of 49p from the Fund Management and 14p from investment company profits. Dividend for year 45p.  Importantly fee rates are reported to be maintained or growing and outlook is “strong”
  • Estimates Investment company profits are difficult to predict but results look in line
  • Valuation Per 15X yield 3.3%. Price/Book 2.5X for ROE 22%
  • Conclusion The company has transformed itself into a specialist asset manager which has the effect of delivering a predictable and high ROE of 22%.  While 15X is not a bargain these could easily be 18X. This is one to own. The smaller emerging version is Gresham House

Close Brothers – Trading Statement

Share Price 1495p

Mkt Cap £2.26bn

Conflict Disclosure: No holding

  • Update Trading is referred to as “solid”. Loan book up 3.6% year to date. Impairments remain low and NIM in line with 2018. In asset management client assets were up 4% between January and April. Winterflood trading is in line with H1
  • Estimates Forecasts anticipate 1% EPS growth to July 2019
  • Valuation   PER 10.7X  Yield 4.5%. Price/Book 1.7X for ROE of 16%
  • Conclusion This company is looking like a reliable annuity.  Essentially reining in lending by calling the cycle doesn’t make for a strong investment case. Which is why someone with a different view may take it out given the SOTP valuation is above £20.  This company imbues feelings like I once had about Latin homework.

IG Group – Pre Close Update

Share Price 595p

Mkt Cap £675m

Conflict Disclosure : No holding

  • Update Revenue in Q4 was subdued which has picked up in May. FY revenue is £475m and PBT for the year expected to be £190m (FY E £198m).  The subdued conditions were driven by ESMA OTC leverage revenues down 26%,. The 43p dividend will be maintained which is just covered
  • Estimates While the year to March 19 is a little behind expectations it is possible that the 8% PBT increase forecast for the current year could prove to be light
  • Valuation PER 10X yield 9.1%. Plus 500 trades on 5X and yields 15%.
  • Conclusion This may be the eye of the needle. Brave investors may go to the strategy presentation at 4pm today to gain the necessary confidence as to whether this is the bottom. The shares were 893p a year ago. It wouldn’t surprise me if they were back there a year from now.
  • It was the interest rate reduction between August 1998 – July 1999 from 7.5% to 5% that drove the internet bubble. With rates now at 0.75% there is room for valuation still to go further
  • While inflation expectations remain low – and declining
  • But in inflation adjusted terms we have had a bubble.  It just didn’t feel like a boom.

Knights Group – Pre Close Update

Share Price 283p

Mkt Cap £207m

Disclosure : No holding

  • Update Revenue ahead of expectations at £52.4m (2018 A £34.8m). Within the growth of this acquisitive business organic growth is reported to be 15%.  PBT £9.7m (2018 £4.8m) and net debt below expectations at £14.1m.  The 4 acquisitions made during the year are trading well
  • Estimates The beat is a modest one. Going forwards 36% revenue growth is expected which translates to 75% EPS growth from a 19% operating margin
  • Valuation PER 17.4X yield 0.2%. EV/Sales 4.2X
  • Conclusion The company made its 4 acquisitions at 1.2X – 2X revenue. With such a large arbitrage between public valuations (4.2X revenue) and private ones the acquisition opportunity is substantial.  At this early stage of the quoted legal market development this is a sector not to be avoided. At some stage that arbitrage window will close. That will be the time to sell.

Non Standard Finance – AGM update

Share Price 48p

Mkt Cap £151m

Disclosure: No holding

  • Update Branch based loans have opened 7 new stores bringing the number to 73. Guarantor loans continues recent trends, For clarity the March results showed 60% loan book growth and impairments growing to 20%.  While loans at Home is increasing its returns as the company shifts the loan book to a shorter duration. Which has been Morses Club strategy for many years.
  • Estimates Not expected to change
  • Valuation  PER 7X yield 7%. 
  • Conclusion Under the terms of the bid NSF will issue 2.26bn new shares. If the dividend was maintained at the anticipated level of 3.74p per share this would cost £84m which in the context of Provident’s anticipated £130m PBT in 2019 looks sustainable. The shares are very cheap.

Mortgage Advice Bureau – AGM update

Share Price 612p

Mkt Cap £313m

Disclosure No holding

  • Update AR numbers are up 5% year to date while the company cautions that the longer time taken for housing transactions to complete has impacted the timing of the banked revenue. However they say the majority of their AR’s have strong growth expectations for the current year.
  • Estimates The 10% expected revenue growth this year sounds like it could be a little aggressive. With a 95% dividend payout ratio this could cause concerns over the dividend. The accounting policy for revenue states that revenue is accounted for when it is guaranteed to be received so the banked revenue referred to is also likely to be accounting revenue.
  • Valuation PER 20X yield 4.5%
  • Conclusion This share is priced like an annuity. If there is uncertainty over the estimates it is certainly 20% too high.

jeremy@charltonillingworth.co.uk

17 May 2019

  • STM – Note out for subscribers this morning
  • Metro Bank – Metro Bank completed a £350m fund raise at 500p last night to bolster its Tier 1 capital. It also announced £70-£75m opex savings and £40-£45m capex savings from flexible store formats. I guess the dog bowls in stores may be at risk. This company has lost 85% of its value in the last 12 months.  This is the risk for the high growth and highly valued lenders.  Funding Circle has lost 40% of its value since IPO on the back of the loan book performance deteriorating.  There isn’t sufficient disclosure here to split the marketing costs into the broker payments and discretionary advertising so we can anticipate how long their £300m of cash will last them in the event of weaker loan book performance but at 4.5X sales there remains planet of downside.
  • Trufin announces a tender offer to return £5m to shareholders at 92p per share following its sale of its Zopa holding for £44m . Share Price is 88p

Next week

AGM season is getting going now. Expected news nest week:

Tuesday

  • Provident Financial – Trading Update.        Expect plenty of rhetoric about NSF

Wednesday

  • Close Brothers – Trading Update                 Expect more of the same
  • Intermediate Capital – FY Results               Expect strong AUM growth
  • Paragon Bank – H1 Results                          Still stuck with Buy 2 Let

Thursday

  • Tungsten – Trading update                           Will they escape without a fund raise
  • Nucleus – AGM                                             Similar to Integrafin but we haven’t had their March AUM update yet
  • AJ Bell – H1 Results                                      On 55X it may be hard to not run into profit taking

Integrafin – H1 Results

Share Price 406p

Mkt Cap £1.35bn

Disclosure: No holding

  • Results FUD of £34.4bn as previously announced represents a 15.6% increase over 6 months. Revenues up 6.7% to £47.6m and PBT up 19.8% to £22.4m. EPS up 25% to 5.5p.  Net assets are £101m of which £88m are tangible. Outlook is confident.
  • Estimates H1 revenues are 48% of FY revenues so estimates look sound.
  • Valuation  PER 31.6 yield 2.1%
  • Conclusions The growth outpaces the 2% margin contraction so this looks like a long term market leading compounder. I find the statement in their annual report that there is no LTIP “because it encourages dysfunctional behaviour” encouraging that this is a tightly run business.  Expensive but likely to stay expensive.  

jeremy@charltonillingworth.co.uk