Hits: 2

Support Services

  • I was fairly sure the support services analyst I saw yesterday was clinically depressed talking of the pointlessness of her role when things are imploding around her.  She said it was worse than 2008. We noted that in 2008 it was a financial crash and support services were a relatively safe haven then. But just now with Kier, Interserve, Carrillion all look to be in trouble it appears all these allegedly safe haven government contractors are turning out to be not the safe haven they are supposed to be.  The reason they are going wrong however is the same as the reason the financial crash happened. The sector is not a growth sector.
  • In 2008 mortgages were not a growth sector so instead of admitting that, loans simply became more risky in order to manufacture growth. Government contractors likewise has stopped growing so the usual trend of increased leverage combined with acquisitions manufactures growth which is a finite path that ultimately comes to an end. The warning sign is a stable sector that keeps growing its debt .

  • The sector that has grown steadily and now seems to be perceived as a safe haven may well be travel.  Forecasts continue to extrapolate the past:
  • When the canary in the coal mine could well be Thomas Cook who have increased their debt pile to £389m resulting in a transfer of value from shareholders to debt holders

  • Conclusion And maybe this time round financials could just possibly be a safe haven. Just maybe.

Market Performance

  • Meanwhile stocks are now selling off indiscriminately. In financials the largest fallers over the last month are:

            1yr fwd PER   Yield

Brooks Macdonald      -12.8%       11.3X               3.9%

Investec                      -13.2%             7.7X                 6.2%

WH Ireland                  -23.2%             n/a

Brewin Dolphin            -12.6%            12.7X               5.9%

Funding Circle             -11.8%             n/a

Liontrust                      -11%                11.8X               4.4%

River & Mercantile      -13%                12.9X               6.7%

Cenkos                        -16.7%             7.0X                 14.4%

CMC Markets             -12.6%             8.9X                 7.4%

FairFX                         -12.8%             13X                  n/a

Numis                          -12.5%             11.2X               4.2%

Of these I would highlights Cenkos and Brewin dolphin

Cenkos

Share Price 63p

Mkt Cap £35m

  • News – CFO is to leave in March 19. A search for a replacement will be conducted. This follows Jim Durkin returning as CEO. Today there are a number of change of adviser announcements as the acquisition of Smith & Williamsons NOMAD operation completes.
  • Estimates – There is no vivibility of broker earnings which remain lumpy. Over the last 6 years revenue has ranged from £43m to £76m while profits have ranged from £2.5m to £15.4m.
  • Valuation – Net assets at June 17 were £26m of which £22m was cash.
  • Conclusion – With the franchise building from the acquisition and new management this could be an interesting recovery situation. The only question is will investors be able to buy the stock at NAV which is still 25% below the current level.  It seems results in march may not read well. That could be the opportunity.

Brewin Dolphin

Share Price 313p

Mkt Cap £886m

  • Estimates – Revenue has some market sensitivity but current estimates for the year to September 17 are for revenue growth of 7% to £353m. September 18 results showed a 10.7% increase in adjusted PBT to £77.5m from £42.8bn of AUM
  • Valuation – Net cash t September was £186m do the EV/AUM is 1.6%.  Revenue multiple is 2.1X.  The market price for disctretionary fund managers is c 3X revenue or 3% of AUM.3X revenue would provide a share price of 414p and 3% AUM would provide a share price of 519p
  • Conclusion – The share price is wrong