The Financial Grimes: Company shares looking cheap

This top City analyst reviews the financial sector stocks making headlines today. 

Jeremy Grime spent 15 years as a financial sector analyst, working at Altium Capital, RBC Capital Markets, Panmure Gordon and most recently as Director of Research at finnCap. Jeremy is also a qualified accountant.

Jeremy's blog is written with more experienced investors in mind. However, we have included a brief glossary at the bottom of the page to help those less familiar with some of the language used. For more on key financial metrics and valuation ratios click here.

The Sunday Times had its usual article on St James’ Place this week end ahead of a big week for small cap news:

FY Results from:

• K3 Capital (LSE:K3C)

HY Results from:

• Aquis Exchange (LSE:AQX)
• JTC (LSE:JTC)
• Personal Group (LSE:PGH)
• Jarvis Securities (LSE:JIM)
• Distribution Fin. Corp (LSE:DFCH)

AGM's

• Jupiter (LSE:JUP)
• Begbies (LSE:BEG)
• Gateley (LSE:GTLY)
• DWF (LSE:DWF)
• IG Group (LSE:IGG)
• Manolete (LSE:MANO)
• Liontrust (LSE:LIO)

City Of London Inv. Group- FY Results 

Share Price 420p

Mkt Cap £111 million

Conflict Disclosure: No Holding

City of London Investment Group (LSE:CLIG) is a market asset management company.

• Results –  FUN $5.4 billion at 30 June is up 6% over the year while management fee revenues were down 6% to £31.9 million and PBT down 11% to £11.4 million. EPS down 12% to 34.9p and the full year dividend payment amounts to 40.5p of which 13.5p was a special dividend. The average AUM was down 3% over the year while the fee margin declined 5% to 76 bps while costs increased in part due to the new REIT team joining. The outlook is "optimistic" and hopes for a return to profit growth in the current year. It also encourages all shareholders to both "attend the AGM" and "read the rest of this report".

• Estimates Results are in line with estimates and for the current year a 3% improvement in pre tax profit is anticipated to £11.7 million.

• Valuation EV/AUM is 2.1%. PER 11.5X, Yield 6.4%.  The only share cheaper fund manager on an EV/AUM basis is Premier/Miton (LSE:MGR) at c 2%, while Jupiter trades at 3.3%.

• Conclusion With Barry Olliff leaving at the end of December combined with a volatile share the shares are cheap.  The company has invested in staff and new teams and I suspect the risks of management change may well turn out to be benefits. The shares could do well, or corporate activity may benefit shareholders

Rosenblatt Group Plc – Acquisition 

Share Price 88p

Mkt Cap £71 million

Conflict Disclosure: No Holding

Rosenblatt Group (LSE:RBGP) supplies a comprehensive range of legal services to its clients. 

• Acquisition – Rosenblatt is buying a Manchester based corporate finance boutique, Convex Capital Limited for up to £22 million, 40% in cash, 60% shares with initial consideration of £13.6 million. The company is changing its name to RBG Holdings Plc, as it evolves to become a broad based supplier of professional services.  The acquisition is immediately and materially earnings enhancing. Last year Convex delivered £8.7 million revenue and £4.3 million PBT, which would make the maximum acquisition cost 5.1X PBT and 2.5X last years revenue. Trading is confirmed to be in line with 1 August update. That update confirmed the corporate division was experiencing delays while overall trading was in line.

• Estimates The acquisition involves potentially the issue of £13.2 million shares, which is 18.6% of the market cap, while adding last year's Convex PBT increases PBT by almost 60%. That maths suggests 50% plus earnings enhancement

• Valuation PER 11.9X, Yield 5.1%.

• Conclusion Rosenblatt has the lumpiest of the lawyer revenues. Adding another unpredictable corporate transaction based business to create earnings enhancement doesn't necessarily make a good investment. Finncap have done the same with Cavendish. I can't help but feel there is a reason these corporate finance boutiques don't float on their own. And to do this at a time when corporate transaction are being delayed according to Rosenblatt's 1 August statement has a defensive feel. The maths of earnings enhancement is very different to efficient capital allocation.  We can expect a de rating.