Risk and Consumers

  • Convicts I found myself yesterday wondering why it felt so wrong that a goodly number of the convicts were sent to Australia for the offence of membership of a trade union.  In those days anything that interfered with the property owning classes was generally a transportable offence. While with the emergence of the middle classes they invented exams as a kind of trade union in order to restrict supply and so keep the prices of professional services up in accordance with the economic laws of supply and demand.  Which is why I had to learn the capital asset pricing model at university. Then I had to be examined on it to become an accountant. Then I was examined on it again to get my stockbroking exams (what was then the SFA). And then I had to be examined on it a fourth time to get my fund management exams with the IIMR.
  • What is risk? So when I learned at the excellent year end round up yesterday from Holly MacKay at Boring Money (www.boringmoney.co.uk) that in order to communicate with investors we need to relearn that CAPM, being based on the measure of risk called Beta, which is a measure of volatility is not actually what investors regard risk to be. In fact it is their level of understanding of a product which is their perceived risk I start to understand just how far away from the customer the investment industry has become.  Of course one of the problems is the regulator is regarding risk as volatility rather the consumers understanding of risk so the industry is obliged to put the regulators rules ahead of the customers rules so change becomes difficult when the regulator is also acting as effectively a trade union and restricting supply.
  • Solution It appears financial education is the easiest solution to this gap between the industry definition of risk and the customers definition of risk.  There is this year for the first time a GCSE in finance which is a good start. I am pleased to say I tried it and passed. Which was a relief. But I suspect that some of the fund management marketing departments should be focussing on financial education rather than selling themselves as planets, explorers, animals and hunters. This would undoubtedly reduce the perceived risk of their products and hence increase demand.

  P2P

  • Zopa yesterday became the first Peer 2 peer to lender to be granted a banking license by the PRA. It will now enter a mobilisation phase ahead of full launch next year.  Zopa was valued at £300m in the latest fund raise and this will undoubtedly help the valuation. Trufin has a 14.9% stake in Zopa which was valued at £44.5m in the June 2018 interims which was 28% of the £159m NAV. The market cap is now £198m having fallen 10% in the least month.

Park Group – H1 Results and Strategy   

Share Price 78p

Mkt Cap £145m

 Results – Billings were up 3% and revenue reduces 10% to £27.4m in H1 as a number of low margin customers departed.  Pre tax losses were reduced from £1.9m to £1.5m after interest receivable increased a little to £0.8m from £0.7m.  Cash balances were £212m (2017 £199.6m). Dividend increased 5% and results are said to be in line with expectations. The new four pronged strategy will be revealed at todays investor day but the four prongs are around focus, ease of use, efficiency and a new product launch.

  •  Estimates – Estimates to March 2019 look for a 1% revenue increase and a 4% PBT increase for the year to March 2019.
  • Valuation – PER is 12.7 and yield 4.3%
  •  Conclusion  – This is a well invested platform which has weathered the headwind of falling rates for 10 years. It now looks like those headwinds will become tailwinds just as they are launching a new product about which there is little detail in the results. Were interest rates to increase by 0.5% this could add c 8% to earnings by my calculations. And if the new product gets traction the shares could be re rated.  With the well invested technology and the virtual card it could potentially get a technology type of rating. This could be an inflection point.

One pm – Trading Update 

Share Price 42.5p

Mkt Cap £37m

  •  Update  Trading is in line with expectations for the half year to November and the group expects to pay its maiden interim dividend which will be one third of the expected final dividend.
  • Estimates Forecasts look for 21% EPS growth for the year to May 2019 which is 7.55p per share
  • Valuation PER is 5.5X and yield 2.4%. The NAV per share is 56p on which the company produced a 16.7% ROE last year.
  • Conclusion A small cap lender can reach extremes of undervaluation. This has. 2X book value may be a normal valuation for a company producing a 17% ROE which is 112p per share, 163% above the current share price.

IG Group – Pre close update

Share Price 608p

Mkt Cap £2.24bn

  • Update Revenue in H1 is 6% lower than last year. The company confirms that since the regulatory changes in Europe group revenue has been 10% lower which is 20% lower within the ESMA regulated territory and 9% increase in the other regions.
  • Estimates Market forecasts appear to anticipate a 10% in group revenue for the year to May 19 do this looks in line with expectations
  • Valuation PER 11.7X yield 6.9%. Plus 500 trades at a PER of 8.3X and yields 10% while CMC markets trades at a PER of 9.6 and yields 6.5%
  • Conclusion It appears these companies have guided the market broadly accurately which is quite an achievement given the lack of visibility over the customers response to lower leverage limits.  The shares are very cheap and the sector may have a relief rally

News

  • The entertaining event of today is likely to be Mike Ashley presenting his vision of the High Street to the House of Commons. Take your seats at 3.30pm.
  • McColls Retail – Trading Update. EBITDA now expected to be £35m for the year. Full year like for like sales down 1.4% with higher tobacco sales implying lower gross margins.  Net debt improved at £100m. 59 stores refurbished producing 5% uplifts and 11 new openings while 66 were “removed”
  • RPC Group – Have terminated discussions with Bain Capital while discussions with Apollo are ongoing. The panel have extended the deadline to 21 December to make a bid.
  • MIFID 2 – I am hearing the Investment association have been to see the European regulator(ESMA) to present the case that Mifid 2 is not working for the investment industry. Allegedly ESMA suggested they talk to the FCA to present their case as Mifid 2 was driven by the FCA. If this is the case we are therefore faced with the prospect of a Brexit where the Europeans can repeal Brexit leaving the London investment management industry at a significant disadvantage against Europe and also the US where bundling of services continues. 

AFH Financial – Acquisition 

Share Price 383p

Mkt Cap £161m

  •  Acquisition – CTL3 together with 3 subsidiaries is being acquired for a max consideration of £10m bringing £530m AUM, and last year’s revenue was £4.7m of which PBT was £1.1m. Once integrated PBT is expected to be £1.4m
  •  Estimates – October 2019 revenue estimate is £76m from which £14.7m of after tax profit is expected. If we add the £1.4m PBT or £1,1m PAT this looks to be c. 7% earnings enhancing.
  • Valuation – PER is 13.7 for October 19 which post acquisition may fall to 12.7X with a 2.3% yield.  Harwood trades at 16X with a 2.5% yield
  •  Conclusion  – Having tracked all acquisitions since formation it appears that on average AFH have added c. 100% of the acquisition price to the value of acquired businesses/assets. This looks like more of the same.  The shares are only 5% off their highs but the earnings acceleration is making them look anomalously cheap.

Calendar

This week we have

  • Tuesday –                  Park Group Interims.              Lets not underestimate their sensitivity to increased rates  PER 12, Yield 4.3%
  • Wednesday –             Numis Full Year Results                     Shares are off 34% from their highs. Outlook must be trickier . PER 10.6, yield 4.4%

PCF Bank Full Year Results   Integration of recent acquisition will be important PER 12.3 Tield 1.1%

  • Thursday –                 Impax Full Year Results                     With AUM growth slowing and a little net debt perhaps the 14.7X PER will start to look up with events

Brexit vs St James Place – Which is cheaper ?

  • Comparison There has been an awful lot of noise about the cost of Brexit but a brief comparison of costs illustrates that Brexit is considerably cheaper than using St James Place Wealth management.
Brexit SJP
GDP/Income £2trn £28k
Net worth £10.7trn £500k
Charge 39bn 11.5K
% Revenue 1.95% 28%
% worth 0.36% 2.30%
  • In the table we have just included the £39bn The UK pays to the EU each year as the cost of Brexit but some estimates include an anticipated slow down in the economy which some say could cost £100bn a year. In which case the % Revenue figure would rise from 1.95% to 5%. And the % worth figure would increase from 36bps to 95bps. However this higher number is still lower than the SJP figure as a % net worth. Note also I have just used an average annual management fee for SJP and not included the many entry and exit charges which for pensions can be an extra 6% exit charge and up to 5% entry charges for some products
  • Conclusion It seems there should be more noise made about St James Place fees than there is about Brexit. Even though that wouldn’t be very British.

 News

  • Kogan.com, Australia’s answer to Amazon in online retail has launched into mortgage selling in Australia.  One wonders how long until Amazon or Kogan enter the UK mortgage market.
  • The FCA has pushed back the launch of its credit information market study from Q4 2018 to June 2019 because it wants to prioritise its market study on general insurance pricing.  While general insurance underwriters may be protected as they are earning a competitive return on risk capital one has the feeling that broker commissions, particularly for add on products are high and brokers may well be vulnerable.  Marsh Maclennan could well have acquired JLT to mark the last of the glory days of insurance broking.
  • The Intu bid has fallen through after House of Fraser has closed a lot of stores failing to agree terms with landlord Intu

Results

XPS Pensions – H1 Results

Share Price 165p

Mkt Cap £336m

  • Results Following the Punter Southall acquisition revenue is up 113% to £52.2m, PBT adjusted up 62% to £8.6m and Adjusted EPS up 8% to 4.2p. Dividend raised 10%. The outlook statement refers to confidence and new client wins in H2 but then says full year results are expected to be “broadly” in line. Balance sheet net assets are £148m but intangibles are £207m leaving negative net tangibles. Net debt is £47m.
  • Estimates FY March 19 estimates look for £113m revenue and £21.2m PBT, EPS of 10.3p. 46% of revenue has been delivered in H1, 40% of PBT. As cost savings from integration come through along with new client wins those numbers could be achievable.
  • Valuation PER 15 and yield 4.5%
  • Conclusion The company looks set to benefit from the CMA review into the investment consulting market but the valuation looks up with events.

Premier Asset Management – FY Results

Share Price  202p

Mkt Cap £213m

  • Results Adjusted PBT up 28.6% to £18.9m, EPS up 41.7% to 12.1p, the quarterly dividend is up 28% to 10.25p. The outlook says flows have been slower in the new year as markets have become tougher.
  • Estimates These results look very modestly ahead of consensus but given slower flows noted forecasts may not change at this stage
  • Valuation PER 12.4 and yield 4.95%
  • Conclusion The shares are 33% down from the high in July and now look reasonable value subject to markets

M&A and Debt

  • M&A We have had an enormous M&A cycle.  Just as markets appear to be rolling over it seems the brokers are at it with Macquarie said to be discussing buying Liberum at c 2X turnover and 15X PBT while Santander have been looking at Peel Hunt. Yet I can’t help wondering what happened to the boom.  It seems that just perhaps the answer is to do with debt levels. So to work out what happens next I find it helpful to look at history.  A good example of countries having too much debt is when we put too much debt on Germany after WW1.
  • The chart below shows the sequence of events

  • History After Germany defaulted in 1923 a kindly Chicago banker called Benjamin Dawes organised a $200m loan from France and Belgium to Germany in exchange for getting the Ruhr back receiving the Nobel Peace Prize for his efforts. JP Morgan swiftly floated the loan in a hugely over subscribed issue.  But this didn’t stop the financial distress so in 1928 Mr Young proposed a reduction in Germany’s payments as the loans from US banks to prop up the German economy were beginning to dry up.
  • Nationalism As the European economies sunk into recession in 1931 a one year moratorium was placed on all debt and reparation payments by President Hoover and in November 1932 European nations agreed to cancel their claims against Germany.  Of course the national unrest this caused resulted in the Germans electing a disruptive new leader called Adolf Hitler in 1932 who immediately started a huge fiscal stimulus for the German economy.
  • Inflation In the 1930’s of course Germany had a huge inflation problem which we don’t have today.  What we have today is austerity.  The difference is that with austerity the wage side of the equation is not growing while real inflation is understated by factors such as a large hedonic adjustment whereby goods are deemed to deflate because of technology improvements. And just maybe that why we don’t feel like there has been a boom.
  • Again The result seems likely to be a period of currency adjustments and nationalism which is just starting. Followed by a huge fiscal stimulus. And changes in governments.  Just maybe we have been here before.

Companies

  • WH Ireland H1 Results – A significant loss is reported from the private client division while corporate broking made a positive contribution.  Revenue declined in private wealth year on year where the “project Discovery” migration has been reported to have caused problems.
  • Brewin FY Results – AUM up 6.7% over the year gave PBT up 10.7% to £77.5m. Full year dividend of 16.4p is paid from EPS of 21.7p. With cash now up to £186m and the company undergoing significant innovation as changing regulation, legislation and technology is fragmenting the industry I can’t help thinking they need to spend some of that cash on acquisitions to accelerate innovation.
  • Ramsden – H1 results show 10% revenue increase translating to a 3.7% decrease in PBT as the company invests in new stores and infrastructure.  The ROE remains in the high teens implying investment is beneficial.  Shares are down 23% from their high in January. PER is now a modest 9X and yield 4.7%
  • Funding Circle – Announces £150m commitment from British Business Bank for lending to SME’s

News

Rathbone CEO Philip Howell is to stand down in May 19 to be succeeded by Paul Stockton the previous CFO

A J Bell – Pricing 

Share Price Range 154p-166p

Mkt Cap £626- £675m

  • Timing A J Bell confirms the IPO pricing. Prospectus will be published later today. Applications must be in by 5 December with final pricing announced on 7 December and the shares start trading on 12 December.
  • Valuation I think the comps for AJ Bell are Integrafin and Hargreaves Lansdown which trade on 24X Sept 19 PE and 29X June 20 PER respectively. Not sure what the forecasts are but last year they did £28.4m PBT and £22.6m PAT which may grow at c 20% so lets say £34m PBT and £27m PAT for Sept 19. Perhaps if current markets persist this may be demanding but the PER would be c.23X – 25X.  That looks good value. The yield would equate to 2.8% – 2.6% ignoring potential special dividends, of which there have been a number historically.
  • EV/AUM  In terms of EV/AUM the valuation represents 1.25%-1.35% which compares to Integrafin at 2.7% while Hargreaves Lansdown trades at 9.4% largely representing the differing revenue yields on the AUM.

Amigo Holdings – H1 Results 

Share Price 265p

Mkt Cap £1.22bn

  • Results The loan book increased 11% over the 6 month period to £671m resulting in 40% year on year revenue growth to £130m. Impairments grew from 19% to 23% primarily as a result of the switch to IFRS 9. Balances are 95.6% paid to terms. PAT was up 40% to £47.2m while basic adjusted EPS are up 27% to 10.8p. Leverage is 2.3X adjusted equity. Cost income ratio has reduced from 23% to 17% as economies of scale apply. Outlook is confident
  • Estimates Revenue for the year to March 19 are for £261m and 21.1p EPS. In H1 the company has delivered 50% of the revenue and 51% of the EPS forecast implying full year numbers are too low
  • Valuation While the company produces 10% ROCE useful leverage, aided by the recent securitisation provides a 44% ROE. The PER is 11X and yield 3.2%
  • Conclusion The securitisation since the period end has reduced funding costs on that £150m of funding by 5%. After some post IPO surprises in terms of founders stepping off the board the company is performing strongly and with upgrades today may recover above its 275p IPO price from July