The Financial Grimes: These shares are now looking cheap
This top City analyst reviews the financial sector stocks making headlines today.
20th September 2019 08:54
by Jeremy Grime from ii contributor
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.
News
- Bids – After Charles Taylor (LSE:CTR) yesterday and Smith & Williamson going to private equity backed forms we have StatPro (LSE:SOG) today for £161 million. Happy Friday.
- Manolete (LSE:MANO)– AGM statement is reassuring with 60 new cases invested and 18 completed since March compared to 12 in H1 2018.
Smith & Williamson – Acquisition by TilneyÂ
Valuation £625 million
Smith & Williamson offer investment management, accountancy and tax advisory services.
- Offer – The price of Smith & Williamson has been agreed with the private equity backed Tilney at £625 million. That represents 2.3X the (slightly dated) April 2018 reported turnover. Or 12.6X Adjusted EBITDA.  Â
- Valuation – This is a comparable valuation to Brooks Macdonald (LSE:BRK) and a little lower than Rathbone (LSE:RAT) who looked at Smith & Williamson in 2017.
| Mkt Cap | Mkt Cap/EBITDA | Mkt Cap/Rev | ||
| Brewin (LSE:BRW) | 958 | 10.4 | 2.9 | |
| Rathbone (LSE:RAT)* | 1338 | 14.6 | 4.3 | |
| Brooks Macdonald (LSE:BRK) | 274 | 12.3 | 2.6 | |
| * PBT in place of EBITDA as it is a bank |
- Sector comps The stats below show the typical private equity traits of private equity for Tilney. High operating margins off the back of tightly controlled staff costs and a balance sheet that has been stripped to the bone (net debt £345 million).
| Tilney | Smith & Williamson | Brewin | Rathbone IM | |
| Year End | Dec 18 | April 18 | Sept 18 | Dec 18 |
| AUM (m) | 23,000 | 20,100 | 42,800 | 38,500 |
| Clients (k) | 100 | 62 | 60 | |
| Revenue £m | 228.9 | 266.7 | 329 | 275.3 |
| Adjusted EBITDA £m | 87.4 | 49.41 | 83.1 | 78.8 |
| Costs £m | 177.1 | 218.0 | 252.3 | 196.5 |
| Staff Costs £m | 88.1 | 157.5 | 174.8 | 104.2 |
| Net inflows p.a | 2.50% | 2.80% | 3.70% | 3.40% |
| Average head count | 1133 | 1722 | 1763 | 1296 |
| Revenue yield on avg. AUM | 97.4 | 132.6 | 79.3 | 76.3 |
| EBITDA margin | 38.2% | 18.5% | 25.3% | 28.6% |
| Net debt | 345.1 | 280 million NAV | 274 million NAV | 464.1 milion NAV |
| Staff cost/head (£) | 77,700 | 91,480 | 99,149 | 80,401 |
| AUM/head (£million) | 20.3 | 11.67 | 24.28 | 29.71 |
| AUM/Client (k) | 230 | 690 | 642 | |
| Client/Head | 88 | 35.2 | 46.3 | |
| Staff cost/other costs (%) | 49.7% | 72.3% | 69.3% | 53.0% |
| Offices | 55 | 12 | 30 | 15 |
- Conclusion – I wonder if this combination could challenge the traditional models of Brewin and Rathbone, now their AUM are similar. Certainly it's easier to pay up when you can strip out the balance sheet while Brewin raised £60 million fresh equity last May for acquisitions. This may well put pressure on the traditional models. Certainly for Brewin, whose shares are looking cheap now they are down 20% from their January 2018 peak they run the risk of being a target.
| Glossary | |
|---|---|
| PBT | profit before tax |
| EPS | earnings per share |
| DPS | dividend per share |
| ROE | return on equity |
| EBITDA | earnings before interest, tax, depreciation and amortisation |
| PER | price earnings, or PE ratio |
| Yield | dividend yield |
| FCF | free cash flow |
| NAV | net asset value |
| Price/Book (PB) | a company's share price versus what it owns |
| Book Value | a company's worth after subtracting debts and liabilities from assets |
| AUM | assets under management |
| FUM | funds under management |
| CULS | convertible unsecured loan stock |
| ARPU | average revenue per user |
| OTC | over-the-counter |
| FCA | Financial Conduct Authority |
| ESMA | European Securities and Markets Authority |