Markets

  • It has been quick. The FTSE small cap index is up 15.7% from its low in October. The FTSE 100 is up 7.2% and it is now becoming hard to find positive stock ideas. It is striking that while most people don’t believe they will be better off according to this Edelman Trust survey of 32,200 adults in developed economies such as The UK and the US the stock market disagrees.  56% of respondents globally said that capitalism in its current form does more harm than good.  Distrust of capitalism was 53% in the UK and 69% in France.
  • The 1920’s markets followed a similar pattern to the 1980’s and it was driven by debt in the 1920’s
  • Today there is cause for concern for similar reasons

IG Group – H1 Results

Share Price 686p

Mkt Cap £2,533m

Conflict Disclosure: I Hold

  • Results Revenue was up 1% to £252m. An 11% increase in costs leads to operating profit down 11% to £100.1m and PBT down 10% to £101.2m. EPS down 10% to 22.4p. Trading revenue was down £1.1m as the prior year benefitted from 2 months prior to ESMA intervention. DPS 12.96p. Core markets revenue declined 6% while significant opportunities grew 43%. Net cash £297m. Outlook reiterates the return to revenue growth in FY20 and the increase in costs being in line with expectations, while the previous strategy of 3-5% core markets growth and extra £60m from significant markets by 2022 is also reiterated.
  • Estimates Last year the company guided to £620m revenue in 2022 at their strategy day. Consensus is for £574m revenue in 2022 so there is some forecast upside over the next 2 years but today, with profits declining 11% there is no catalyst.
  • Valuation PER 17.4X Yield 6.3%
  • Conclusion The shares are up 28% since the October strategy was outlined.  The PER is 17.4 is now becoming up with events like most stocks in the market.

Integrafin – Q1 Update

Share Price 455p

Mkt Cap £1,507m

Conflict Disclosure: No Holding

  • Update. Net inflows of 2.5% over the quarter to December bring FUD up 4% to £39.3bn. The company suggests that Transact had the highest net inflows of all advised platforms. FUD are now 24% higher that 12 months ago.
  • Estimates Forecasts to September 2020 assume 12% revenue growth which assumes steep pricing attrition given AUM are 24% up on 12 months ago. Room for upgrades perhaps as we get closer to the autumn.
  • Valuation PER 33.2X Yield 1.9%.
  • Conclusion 50% operating margins makes growth have a powerful effect on profitability. By 2022 the PER drops to 25X and with upgrades the shares may be discounting perhaps 3 years ahead.  Which is OK for the very long term investor. But not the value investor with a tin het firmly secured under the desk. This remains a market sensitive stock.

jeremy@charltonillingworth.co.uk

A little perspective is sometimes helpful

Non Standard Finance – Investor Day

Share Price 23.5p

Mkt Cap £73m

Conflict Disclosure: No Holding

  • Results to Dec 2019 are expected to be in line with forecasts. Loan book and impairment targets unchanged. Everyday Loans (c.60% of profit) grew the loan book 17% to £218m. Impairments 22.4%. Guarantor loans (c23% profit) grew loan book 29% to £107m. Impairments 22.6%. Home Collected (c 17% profit) loan book shrank from £41m to £39.9m. Impairments were 27% (2018 32.6%). Borrowing were £323m and the company has signed a £150-£200m six year securitisation facility that may reduce lending costs by ( I guess) 2% which could potentially add £3m onto profits.
  • Estimates For the year to Dec 2020 38% PBT growth is anticipated giving 6p EPS and a 3.5p dividend. This estimate doesn’t include the potential financing upside from the securitisation.
  • Valuation PER 5.5X Yield 12.8% from a dividend 1.4X covered for Dec 2019. For 2020 the PER falls to 3.9X
  • Conclusion If we remove our rear view mirror and look forward only the shares are the wrong price. With Woodford and Invesco now out of the stock I suspect a more reasonable share price may be 40p. 

Brooks Macdonald – Trading Update

Share Price 2200p

Mkt Cap £345m

Conflict Disclosure: No Holding

  • Update AUM was down 1.5% in the quarter to December and flat over 6 months at £13.1bn. International increased AUM by 1.8% while UK discretionary grew by 1.3%. Termination of a Grosvenor Wealth account reduced AUM by £244m. Revenue and profits are said to be in line with expectations despite this.  The outlook says expectations remain unchanged which are cautious over short term flows but optimistic over the medium term.  
  • Estimates £23.9m PBT is expected to June 2019. Which is 137p EPS.  
  • Valuation EV/AUM 2.3%. PE 16X Yield 2.7%
  • Conclusion The low valuation relative to AUM underlines the low profitability.  This therefore is a play on margin improvement rather than growth.  With lower flows than peers it may be alittle early but perhaps in 6 months time this could be a good recovery situation.

jeremy@charltonillingworth.co.uk

News

  • Ince Group raises £12m by Accelerated Book Build at 45p/share almost 50% below the 89p share price. There is also a £2m staff offer. For general working capital purposes. The net debt at 30 September was £10.4m. H1 2019 EBIT was £4.4m.
  • Randall & Quilter Roger Sellek, joint CEO, resigns effective immediately. He joined from AM Best last June.  Nothing to see here.

Knights Group Holdings – H1 Results

Share Price 369p

Mkt Cap £273m

Conflict Disclosure: No Holding

  • Results Revenue up 34% to £32m. PBT up 20% to £5.3m and EPS up 9% to 5.95p at underlying level. Net debt £17.1m at 30 October.  43 fee earners recruited in H1 taking the total to 290 at October. 2 acquisitions were made in H1 in Birmingham with 52 fee earners. Outlook refers to a strong start to H2, confidence in meeting expectations for full year and a further 31 accepted new positions to start in H2.
  • Estimates PBT of £13.9m is expected for full year to April 20 which will need a strong H2. That’s based on £72m revenues requiring £40m in H2, a 25% uplift on H1.
  • Culture 15 Reviews on Glassdoor provide an average score of 3.4/5. Comments from former staff range from “No politics” to “corrupt”.
  • Valuation PER 31X Yield 0.9%
  • Conclusion The risks of net debt increasing are highlighted by Ince Group’s fund raise today. On 31X the shares are too high.

Ashmore Group – AUM Update

Share Price 547p

Mkt Cap £3,898m

Conflict Disclosure: No Holding

  • Update Net inflows of 3.6% over the quarter coupled with market tailwinds lifted AUM 7% over the quarter to December 2019 to US$ 98.4bn. Relative performance is good over 3 and 5 years in fixed income but over 1 year is weaker with the exception of equities which accounts for 5.2% of AUM. Outlook refers to a positive outlook for emerging market flows and says the company is well positioned.
  • Estimates 19% PBT growth is expected for the full year to June predicated on 13% revenue growth to £357m. With 7% AUM growth in H1 this looks reasonable.
  • Culture 8 Reviews on Glassdoor award a score of 3.4 out of 5. Comments range from “nice place to work” to “nice people terrible culture”.
  • Valuation EV/AUM 4.6%. PE 19.4X Yield 3.3%
  • Conclusion The statement says that underperformance is to be expected at times of market volatility where risk is added to capture long term upside. With the shares at an all time high they look up with events.

OnePM – H1 Results

Share Price 37.5p

Mkt Cap £33m

Conflict Disclosure: No Holding

  • Update Revenue down 2.5% to £15.6m reflecting change in product mix. PBT down 22% to £3.2m. EPS down 14% to 2.7p. Net Assets up 4% to £56.1m. Loan book up 1% to £143.5m. Origination increased 87% of which 65% was brokered to other lenders. Bad debt provisions increased from 1.9% to 2.2% while investment in personnel and operations increased the cost base. Outlook refers to laying the foundations in a satisfactory H1 alongside opportunities for organic and strategic growth.
  • Estimates Full year PBT to May 20 is expected to be £7.6m which will need £4.4m in H2. This could be aggressive given the increase in costs.
  • Valuation PER 5.7 Yield 2.9%. 
  • Conclusion The shares are cheap but there is no catalyst here to change that. The shares are up from their lows of 24p last August and may tread water over the next 6 months.

Provident Financial – Trading Update

Share Price 421p

Mkt Cap £1,069m

Conflict Disclosure: No Holding

  • Results Q4 is in line with plans. Vanquis modestly above expectations, Moneybarn grew receivable but an increase in impairments delivers a result below the plan while CCD continues to improve in line with the plan. Outlook is well placed.  
  • Estimates £162m in the Dec 2019 PBT consensus which is expected to grow 10% to £178m in the current year. EPS 52.9p and DPS 32.1p.
  • Culture Galssdoor rating of 3.3 for Vanquis from 131 reviews. More recent reviews appear more positive and refer to good management appointments.
  • Valuation PER 8X Yield 5.7%
  • Conclusion This looks like a great recovery situation. On 8X with plenty of yield it is possible to see 50% plus upside over 2 years.

Secure Trust – Trading Statement

Share Price 1610p

Mkt Cap £297m

Conflict Disclosure: No Holding

  • Update Both loan book and revenue have grown in H2 while lending discipline has not been compromised, nor pricing. The increase in the Bof E capital buffer from 1% to 2% from December 2020 may impact the balance sheet. Outlook is cautiously optimistic.
  • Estimates No change to 2020 guidance. A 16% PBT increase is expected to £47.8m
  • Culture Glassdoor score 3.3. Comments such as “good solid traditional bank” underline the conservatice nature of the company.
  • Valuation PE 10X Yield 5.3%
  • Conclusion The shares have a good yield and if we are in for an economic uptick will do well.

jeremy@charltonillingworth.co.uk

M J Hudson – Pre Close Update

Share Price 59p

Mkt Cap £100m

Conflict Disclosure: No Holding

  • Update H1 revenues are £10.4m. Organic growth was 7%.The company acquired an ESG reporting business in July 2019 and the acquisition of Anglo Saxon Trust is expected to complete in the next 2 months. The board is confident that trading is in line (which is handy when the IPO was 12 December).
  • Estimates June 2020 house broker estimates £22m revenue, £4.1m EBITDA and £1.2m PBT. Net cash post IPO is expected to be £24.7m. Pro forma EBITDA pre investing costs is said to be £5.2m in June 2019. With £10.4m revenue in H1 that leaves an increase of £1.2m from H1. Perhaps half of that may come from The ESG acquisition and with AST scheduled to complete in H2 the organic targets look undemanding.
  • Culture I look forward to meeting this company.
  • Valuation EV/Revenue 3.4X. PE big. EV/EBITA 24X, but pre investing costs lower, perhaps below 13X.
  • Conclusion With 3 divisions of advisory, outsourcing, and data and analytics the business is unique. In the seemingly endless world of regulatory hosepipe squeezing it seems to me that the pricing pressure is moving from the brokers to the fund managers and the fund suppliers are further up the chain. This could be a good place to be as the data and analytics may be where the pricing power is over the next few years. But it is priced accordingly. It looks like 6 months until we get upgrades so hard to see short term excitement here.

City of London Investment Group – Trading Update

Share Price 442p

Mkt Cap £117m

Conflict Disclosure: No Holding

  • Update AUM up 4.6% in sterling over the 6 months to December. Net inflows were $182m (3.3%) and encouragingly the company has visibility on a further $200m of inflows to fund in the next quarter. Fees averaged 75 bps. PBT is estimated to be £6.3m in H1, 21% up on the prior year. 10% increase in the interim dividend
  • Estimates PBT of £11.7m is anticipated for the full year. Having delivered 54% of this in H1 and with visibility on H2 inflows this could be perhaps a 10% upgrade for FY.  
  • Culture With Barry Oliff having now retired it will be interesting to see if the culture evolves from what has traditionally been run tightly in the manner of an owner managed business.  
  • Valuation PER 12.2X, Yield 6.1%.
  • Conclusion With upgrades and management change the company could be in danger of becoming a growth stock. I also quite fancy emerging markets could have a good year this year. With a 6% yield this is one to own.

Charles Stanley – Q3 Update

Share Price 303p

Mkt Cap £154m

Conflict Disclosure: No Holding

  • Update AUM up 2.8% over the 3 months to December to £25.3bn. Net outflows were 1.2%. Revenue was up 14% to £42.7m. No mention of margins. The outlook statement merely refers to revenues benefitting from higher trading volumes and repricing.
  • Estimates 9 month revenue is £128.1m which is 77% of the full year revenue estimate of £167m. If margins are progressing too we could have the first upgrade in a while as we get to the year end.
  • Culture What has been a very traditional environment run for the benefit of the employees looks like it is starting to change.
  • Valuation PER 15.1 Yield 3%.  The 15% margin target would imply profits some 90% higher than the current year which makes this potentially very cheap.
  • Conclusion With progress now coming through there is perhaps 50% upside over 12 months to 2 years, but beyond that it is hard to see it as a growth stock.

Gateley – H1 Results

Share Price 211p

Mkt Cap £242m

Conflict Disclosure: I Hold

  • Results Revenue up 11.8% to £51.8m. PBT up 10.2% to £5.5m. EPS up 10.1% to 3.92p. Net debt down from £6m to £2.1m DPS up 11.5% at the interim stage. Outlook is confident to deliver in line.
  • Estimates To April 2020 £109.8m revenue is anticipated which is 6% growth on the prior year. 11.8% revenue growth has been achieved in H1. A 17% operating margin is anticipated providing 20% PBT growth. With a further 10% increase in fee earners in H1 the 6% revenue growth looks like there is room for upgrades.
  • Culture Reassuringly dull.
  • Valuation PER 15.2X, yield 4%.
  • Conclusion With a strong pipeline of acquisitions and recent hiring combined with low estimates the company can continue to deliver in an understated way over time which could result in rating upside over time as well as strong earnings growth.  With 8% earnings growth forecast after the current year perhaps there may be 20% upside on the shares.

jeremy@charltonillingworth.co.uk

Premier Miton – AUM Update

Share Price 172p

Mkt Cap £272m

Conflict Disclosure: I Hold

  • Update: Net  outflows of 2% over the 3 months to December compares to Polar outflows of 4.4% and Liontrust inflows of 4.8%. Market tailwinds added 4.6% lifting AUM to  £11.6bn at 31 December. Outlook refers to more confidence in the market and progress in creating the management structure post merger and planned synergies from the merger are now underway.
  • Estimates PBT is expected to be £26.6m in the year to Sept 2020 which is expected to rise 16% in the year to 2021 off the back of 6% revenue growth evidencing the cost savings coming through
  • Culture I suspect that the combination of the Guildford based Premier and the city based Miton may result in a more liberated culture.
  • Valuation PE 12.1X for September 2020, falling to 10.7X Sept 2021. Yield 6.1%. EV/AUM 2%
  • Conclusion This is the value play in the space and for a while will remain a cost cutting story. In the short term there is more to be made in the momentum stock of Liontrust but I just can’t help but be attracted to value. A little patience may be required until flows resume post merger. But with Jupiter trading on 14X the value is there. Only M&G is cheaper at 6.3X with a similar 6.1% yield.

AFH Financial – DB transfers

Share Price 354p

Mkt Cap £151m

Conflict Disclosure: No Holding

  • Background There is increasing noise around DB transfers. The FCA are conducting a wide investigation of DB transfers while PI premiums are increasing sharply this year. Yesterday I came across a company set up specifically to harvest DB transfer claims rather like the PPI claims.  And yesterday a welsh IFA, Torch Wealth Management entered administration on the back of SIPP complaints. Harwood Wealth is in the process of going private while shareholders have been obliged to underwrite some of any potential liabilities.  While this is not good for anyone in the industry perhaps it is the regional IFA that may be more exposed, which is reason worry for AFH. While there is no suggestion that any improper transfers have been concluded the cost of defending claims can be high.    
  • Valuation PER 12.2X  October 2019 falling to 10.6X October 2020. Yield 2.3%. The shares have rallied 29% from their October lows on the back of a positive trading statement in November reiterating the company’s 5 year aspirations of £140m revenues and 25% EBITDA margins which is £35m EBITDA. The share trade at an EV/aspirational EBITDA of c 4.7X.
  • Conclusion The next few years are likely to contain more headwinds for the sector generally. It is hard to see a re rating for AFH against that background. Results to October 2019 are awaited.

jeremy@charltonillingworth.co.uk