Close Brothers  –Trading Update

Share Price 1455p

Mkt Cap £2,198m

Conflict Disclosure: No Holding

  • Update Banking increased loan book 0.9% in Q1with a stable NIM and a modest increase in bad debts. Asset Management increased AUM 1.7% to £11.9bn and Winterfoods was subdued.
  • Estimates. 2% increase in PBT is expected for the year to July 2020. £270m.
  • Valuation ROE anticipated in 16% and the shares trade at 1.8X book value.
  • Conclusion. The company is so cautious it is barely growing. Which may be a time when the impatience of markets is tested and with a SOTP close to £20 it could attract predators interests.  In the absence of a bid the 4.7% yield may be enough for the patient investor.

CMC Group – H1 Results  

Share Price 126p

Mkt cap £365m

Conflict Disclosure: No Holding

  • Results Net Operating income is up 45% to £102m. PBT shows a strong recovery to £30.1m (£7.2m). EPS 9.5p and DPS 2.85p. Revenue increases were driven by a small drop in the number of active clients but a significant increase in revenue per active client. The ANZ white labelling agreement has started to produce revenue with Australian broking increasing by £9m to £14.5m. Regulatory uncertainty remains in Australia with the date for the reforms not yet clear. Outlook is positive and excited.
  • Estimates. FY estimates to March 2020 seem to anticipate £35m PBT which is way too low
  • Valuation The PER of 11.1m is based on forecasts that are way too low.
  • Conclusion  Earnings could double from the current forecasts over the next 1-2 years.  I imagine the share price could do at least that too.

Charles Stanley – H1 Results

Share Price 255p

Mkt cap £130m

Conflict Disclosure: No Holding

  • Results FUMA increased 2.1% over 6 months to £24.6bn while Discretionary AUM were up 6.1% to £13.9bn. Revenue margin was 70bps, up from 62.9bps benefitting from re pricing. Total revenue £85.4m. PBT increased 71.9% to £9.8m which is an operating margin of 11.2%. Outlook is confident of achieving a sustainable improvement in underlying profitability.
  • Estimates Estimates for the full year anticipate £11m PBT from Revenue of £158m, a margin of 7.5%. This has been blown away by the £9.8m PBT achieved in H1, driven by strong revenue and higher margin.
  • Valuation On existing forecasts the company trades on 14.2X and yields 3.5%. If we used a revenue number of £180m and imputed the target 15% margin we get £27m PBT. That is cheap for £130m mkt cap.
  • Conclusion After a few years of failing to deliver this now looks like they could get there.

Manolete – H1 Results

Share Price 510p

Mkt Cap £222m

Conflict Disclosure: No Holding

  • Results The words “these are a strong set of results” always fills me with fear. As if we won’t be able to tell from the numbers. Net Asset Value is £30.9m while the company has an unutilized £20m facility from HSBC. This NAV produces revenue in H1 of £7.5m and PBT of £4.3m. EPS 7.9p. Strong investment in new cases. Of the £7.5m revenue £5.6m was derived from fair value movements.
  • Estimates FY estimates anticipate £10.2m PBT for FY to March which looks reasonable in the light of £4.3m in H1.
  • Valuation The company achieves a c. 30% ROE so may be expected to trade at perhaps 3-4X book value which is around half the current share price.
  • Conclusion This is a fund which achieves a high ROE because of its specialist niche and capital light model.  It is priced as a growth stock. The markets tendency to confuse funds with growth stocks is what attracted the shorters to Burford.  This valuation is out of kilter with reality.

Knights Group – Trading Update

Share Price 331p

Mkt Cap £244m

Conflict Disclosure: No Holding

  • Update H1 trading is reported to be “strong” which is in line with expectations. 43 new fee earners recruited in H1. New larger Manchester offices too.
  • Estimates FY PBT is expected to be £40.6m, EPS 10.7p
  • Valuation PER 20X yield 1%
  • Conclusion Knights is a strong model but 20X is a full valuation for a people business.

jeremy@charltonillingworth.co.uk

Liontrust  –H1 Results

Share Price 896p

Mkt Cap £491m

Conflict Disclosure: No Holding

  • Results  Adjusted PBT up 17% to £17m. AUM at 18 November has increased a further 3% from 30 September to £17.9bn.  With performance consistently strong across the funds and net inflows top of the charts there is little to see here. Except for the stripping out of the £4.5n share incebtivisation expense of £4.5m and the costs relating to consolidating the fund services provider to BONY of £1.4m. It could be argued they are ordinary costs of running the business. Outlook is confident of continued momentum.
  • Estimates PBT of £38.3m is expected for the full year. This looks in line with the £17m delivered in H1 and the acquisition of Neptune at the end of H1 adding 18% to AUM.
  • Valuation PER 15.8X Yield 3.6%. EV/AUM 2.5%
  • Conclusion. The valuations of the fund managers vary modestly, generally trading at 14-17X earnings, while the prospects vary hugely. The prospects for Liontrust are outstanding and it is therefore the one to own. Annoyingly I don’t

Argentex – H1 Results  

Share Price 173p

Mkt cap £196m

Conflict Disclosure: No Holding

  • Results Revenue up 41% year on year to £13.8m. Adjusted PBT £4.3m, equating to a margin of 46.2%. The company now has 932 active corporate clients with 210 new ones signed in the period. The increase in FX turnover was a modest 16% relative to the 41% increase in revenue, suggesting that the spreads have widened. Cash is £32m and the outlook is excited.
  • Estimates. Upgrades are 21% from the house broker Numis today. EPS goes from 7.1p to 8.7p for March 2020 and from 8.9p to 9.2p next year. Quite how 6% EPS growth can be forecast for next year when revenue growth is running at 41% currently is beyond me. Upgraded forecasts assume 4% revenue growth in H2 after 41% in H1. This looks too low by perhaps 30%
  • Valuation PER is 24.3X before 20% upgrades. Yield 1.2%. Given upgraded forecasts may well be 30% too low the shares are probably cheap.
  • Conclusion  These shares are the wrong price because forecasts are far too low. A similar argument applies to Alpha FX which allegedly trades on a PE of 40X.

Alpha Financial Markets Consulting – H1 Results

Share Price 193p

Mkt cap £199m

Conflict Disclosure: No Holding

  • Results Revenue up 9% to £42.9m and EBITDA up 12.4% to £9.5m. EPS up 10% to 6.82p. Net cash £17.1m. As the company continues its global roll out the number of clients has increased from 252 to 350 over 12 months. US revenues grew 38% and new offices were opened in Denmark and Canada. Outlook is in line with expectations.
  • Estimates Forecasts anticipate £10m of EBITDA in H2 against £9.5m in H1.16% PBT growth in 2021 fading to 9% in 2022.
  • Valuation The PER of 13.8X and yield of 3.6%
  • Conclusion This is not a high growth underlying business but the global roll out coupled with the acquisition strategy have the potential to produce good returns, and the shares are reasonably valued. This looks like a GARP stock for the next few years.

jeremy@charltonillingworth.co.uk

Intermediate Capital Group  –H1 Results

Share Price 1494p

Mkt Cap £4,339m

Conflict Disclosure: No Holding

  • Results  PBT up 24% to £153.4m. EPS up 16.5% to 50.8p. Interim DPS up 50% to 15p. Increases driven by AUM up 11% to EUR 41.1bn and fund management profits up 32% to £85m. Investment company profits were lower at £66m (2018 £115m). Weighted average fee rates are 0.86% and the positive outlook guides for a target margin of 50%, previously 43%.
  • Estimates The full year estimate for PBT is £251m which with £153m delivered in H1 shouldn’t trouble the scorers.
  • Valuation With c.55% of the profits delivered from the fund management division where the mandates are long term we could value this at perhaps 12-15X pre tax earnings which provides a valuation of £2-£2.5bn. Then we have an NAV of £1.4bn giving a valuation of £3.4bn- £3.9bn, between 12% and 23% below the current market cap. Yield is 3.3%
  • Conclusion. The shares may be up with events on today’s PBT but with a 24% growth rate despite reduced investment company profits it won’t be long before the company outgrows its valuation.

Equals Group  – Acquisition  

Share Price 85p

Mkt cap £151m

Conflict Disclosure: No Holding

  • Acquisition UK based payment services provider is acquired for £1.7m with a further £2m deferred. The company provides corporate FX and an infrastructure services international payments platform. The founders of Casco will retain a 48% economic interest in the business. The acquisition price represents 2.3X the economic revenues acquired or 25X the economic EBITDA acquired.
  • Estimates. On historic figures the acquisition would add c 1.5% to EPS but close to 10% to revenue.
  • Valuation PER is 14.6X
  • Conclusion  This collection of FX/ payments businesses could well transition into a digital banking platform, but the businesses are early stage generally and there is acquisition risk.  The shares could do well medium term, but it may take longer than Argentex and Alpha FX to get there.

Equiniti – Trading Update

Share Price 227p

Mkt cap £829m

Conflict Disclosure: No Holding

  • Update The “reassuring” performance means FY results are expected to be at the upper end of expectations.  The US business is now building momentum with cross selling new products becoming effective. Leverage is expected to be at the higher end of market expectations. Outlook is well positioned with organic growth expected in the UK and accelerated growth potential from the US while margin improvement is expected.
  • Estimates The 2019 top end of market expectations is £142m and leverage 2.5X.  Next year’s consensus EBITDA of £150m looks very sedate given the strong outlook.  Forecasts anticipate little margin growth.
  • Valuation The PER of 12.2X and yield of 2.5% is low. However with c £360m debt the EV/EBITDA is c8X
  • Conclusion Having had teething problems post the US acquisition of Well Fargo Shareowner Services accompanied by high leverage this is now looking like a strong recovery stock when the leverage turns from a risk to a driver. The shares could re rate as the cash generation increases.

jeremy@charltonillingworth.co.uk

DWF Group Plc –Trading Update

Share Price 125p

Mkt Cap £376m

Conflict Disclosure: No Holding

  • Trading Update  H1 to October will show 10% revenue growth, largely organic and a 16% reduction in net debt. International and connected services showed 29% and 18% growth respectively and 5% from Insurance and Commercial services. H2 pipeline is robust and there is a pipeline of carefully chosen M&A targets.
  • Estimates Last year the company delivered £272m revenue and forecasts appear to anticipate £312m for the year to April 2020, which is 15% growth, compared to 10% growth achieved in H1. When last year’s results were announced in July the house broker downgraded forecasts so this upbeat statement looks like it will be accompanied by a downgrade, which is a shame to have two downgrades in the first year post IPO.
  • Valuation PER 11.7X, yield 5.7%.
  • Conclusion. The lawyers are starting to establish themselves an upgrade and downgrade stocks. Knights (19.8X PE) and Keystone (36XPE) look like the upgrade stocks while Ince Group (5X PE) and DWF (11.7X PE) look like the over optimistic stocks. Gateley is the reliable, if slightly dull one ( 11.5X PE) while RBG makes it numbers by selling cases (11.9X PE). I suspect Gateley and Knights may be the outperformers.

H&T Group Plc – FCA intervention 

Share Price 19p

Mkt cap £40m

Conflict Disclosure: No Holding

  • FCA Review  The FCA is investigating H&T’s affordability process for its High Cost Short Term Credit, which is the unsecured lending business. As a result the group has ceased all unsecured lending temporarily. A Skilled person review is being carried out, which will inevitably carry a one off cost. The review will go back 6 years to determine whether redress may be payable. Because the loan book has been growing over 6 years the average loan book has been £3m over that period.
  • Impact The personal loan book was £18.4m ay June 2019 and the annualised revenue margin on the loans was 116%. At the gross profit level this accounted for 25% of profit in H1 2019, but the proportion of revenues in the High Cost Short Term Credit segment is 4%.There will be customer redress to pay, one off skilled person review costs and the loss of revenue from ceasing lending.  The company states it expects to pay redress from existing resources.
  • Estimates It would appear that the review amounts to a comparatively small part of the loan book. This year PBT is estimates to be £17.6m and this will be impacted substantially by the cessation of unsecured lending, before we consider the costs of redress.
  • Conclusion  The shares could fall 20% on this.  Just when things were going so well, with a strong gold price.  Note that Ramsden’s don’t do unsecured lending. The market has always been cynical about the unsecured loan book and it has proved to be right

jeremy@charltonillingworth.co.uk

  • Urban Exposure responds to Tchenguiz’ recent proposal to spin out the management company saying it has received other proposals “along with other value enhancing opportunities” which it is considering.

Non Standard Finance Plc – Warning and CFO Change

Share Price 33p

Mkt Cap £102m

Conflict Disclosure: No Holding

  • Trading Update  Operating profit is expected to be 10-13% lower than previous expectations on the back of slower trading in branch based lending (4-5%) and a step change in provisioning on the branch based and guarantor loans business due to the macro environment. Delinguency rates however are reported to be steady or have improved form H1 2019. Home Collected credit is performing well as the impairments reduce with a shortening of the loan book duration. Loan book growth targets are being revised down and impairment targets are being revised up in branch based and guarantor loans but down in Home Collected Credit.  The CFO is standing down after Miles Cresswell-Turner standing down last month.
  • Estimates Adjusted EPS of 5.6p for the year to Dec 19 is likely to come down by 10-13% in line with the statement. The adjusted PBT number was expected to be c £21.7m per downgrades but the statutory number is still a loss of c £14m. The guidance is for a 50% payout ratio so the dividend estimate looks likely to reduce also.
  • Valuation PER 5.5X, Yield 8.9% . The NAV is £181m, but the tangible NAV is £49m.
  • Conclusion The second director leaving may be a function of the incentive scheme expiring in March 2020 out of the money.  With shareholders likely to be asked to re incentivise management it seems possible that a corporate solution may be found instead. The shares are cheap on an earnings basis but are still 2X tangible book value.  There may be upside on a corporate solution but bidders are unlikely to be generous.

Kingswood Holdings – Note 

Share Price 19p

Mkt cap £40m

Conflict Disclosure: No Holding

  • Note I don’t recall seeing a 48 page note written on a £40m market cap loss making wealth manager before.  Pollen Street have a £40m convertible financing facility exercisable at a discount (16.5p) which is exercisable to fund acquisitions at Pollen Street’s option before December 2023. There is a make good agreement whereby the company is underwriting that Pollen Street will double its money to 33p per share and receive this in cash, which would effectively require a sale of the company.  In the event of this not happening Pollen Street are fully secured on the assets of the company. Paragraph 4.6 of the document on 12 September for those interested.
  • Effect I am confident that no institution would invest on the basis of underwriting a private equity firm to double their money on acquisition as yet unknown. However, on the back of this note yesterday there was notable retail volume yesterday. The trade press carried headlines such as “consolidator Kingswood trumps horn over “undervalued” share price.”
  • View  I suspect that retail investors may not be aware of the significant risk of losing 100% of their money in this stock, and I suspect such a structure would not be permitted on most markets. However, AIM companies are regulated by their Nomad.  And with all those fees on offer for acquisitions and a possible sale of the company they are conflicted.  It highlights the worst of AIM, which is bad for all participants.

jeremy@charltonillingworth.co.uk