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Independent Notes Today

  • There are two notes available for subscribers which are more an analytical summary of my thoughts on two companies and are c 10 pagers.
  1. Funding Circle – where I was struggling to understand the valuation. Much to my surprise after a few fairly heroic assumptions I can see how it could be a multi bagger. The heroic assumptions are quite large. However given the upside is understandable that make it a warrant and probably therefore dangerous to be short. Perosnally I think it highly likely that Captain Galactic could have a malfunction in his backpack at some point but at least I can understand the raging bulls in the bullring.
  2. Charles Taylor This is a case of an Illusion of growth. There seems to remain a lack of capital discipline which medium term will result in poor returns. There is a short term value case.  
  • If anyone wants these notes please could you pay a £1k annual subscription (+VAT). This would be for a year’s subscription to all notes.  I don’t want to commit to a number as I want to focus on quality and only produce them when the impulse is there rather than being forced to maintain a production rate which results in benign coverage. I am also open to suggestions. All notes will be 100% independent – even if they are wrong. There aren’t many independent people that write on small caps.  
  • Just reply yes to this email and I can send the two notes together with a note of our reasonable charges for the effort involved. If you want you can have one as a taster

Chart

  • I find myself wondering if we have another leg of the over valuing growth phase rather like in the far east crisis and LTCM crisis of 1998 when Greenspan had called markets over exuberant we had the dot com bubble to follow. In Germany the 30 year bond now yields 0.68% while inflation is 1.5%. The UK 10 year chart is below. Perhaps the political crisis of 2019 is the equivalent of the 1998 far east crisis.

News

  • Wealth managers Canaccord acquires the wealth management business of Thomas Miller for £28m which is 2.8% of the £1bn of AUM. That is in line with what we would expect when they generate 84bps revenue yield. Thomas is a large UK manager of insurance mutual competing with Charles Taylor.
  • Platforms Fundscape published their Platform Report yesterday for 2018. It seems the average decline in a platforms AUA in Q4 was 6.3%. Nucleus outperformed ay -3.4% while Integrafin outperformed ay 4.2% decline.  An illustration of how much stickier these intermediary platforms are is the Hargreaves Lansdown comparator which was down 10.4%. The winner of the hotly fought contest for worst intermediary platform was cofunds with outflows of 9% in Q4 taking its AUM to £85.9m. Aegon paid £140m for Cofunds in 2016 when it had £77.5bn of AUM/A before achieving £60m of synergy and replatforming its customers. It appears to other peoples platforms. Meanwhile it was apparent this week from Royal London’s results that Ascentric had spent £100m on it re platforming over the last 3 years.

Gresham House – JV with Aberdeen Standard

Share Price 500p

Mkt Cap £124m

Disclosure : I hold

  • JV – Aberdeen is taking a 5% stake in Gresham House and the two companies are forming a 50/50 JV in relation to the Strategic Public Equity process. And this morning it seems that some staff have elected to defer bonus into shares where a 50% enhancement is given on the performance condition of 7% per annum compound growth over 3 years
  • Estimates – House forecasts are for £9m PBT in 2019 and EPS of 29.4p with a dividend of 4.8p before any contribution from this JV
  • Valuation – PER 17X and yield of 1% is a premium to most asset managers
  • Conclusion – This is interesting because it is an example of the distribution strength of a large asset manager being accessed by a niche specialist. With industry headwinds small asset managers are only likely to thrive with a specialist process but small asset managers inevitable have narrower distribution.  How long until the large asset managers start to buy the specialists I find myself wondering.

Sanne Group – FY Results

Share Price 504p

Mkt Cap £735m

Disclosure: No holding

  • Results Revenue up 26% to £143m. PBT up 14.4% to £44.4m and EPS up 9.7% to 24.1p. DPS up 9.5% to 13.8p. Outlook expects strong performance in 2019 and confident in medium term. Organic revenue growth is shown as 11.1% of the 26% revenue growth. Net debt was £53m. Net assets are shown as £193m but stripping out goodwill and intangibles this is negative £63m.
  • Estimates The 24.1p EPS looks a tiny bit shy of the 25p consensus but the bullish outlook suggests the current year’s 20% EPS growth forecast is in tact.
  • Valuation PER 16.8X and yield 3 %.
  • Conclusion There is room for scepticism when acquisitive stocks achieve “organic” growth by acquiring companies and cross selling services to the newly acquired customers as this is finite. 2017 ROE of 9% has increased to 19% in 2018.  The business is prospering.