Stockwatch: why this small-cap has an exciting future
1st February 2022 13:26
by Edmond Jackson from interactive investor
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Our companies analyst believes acquisition and an alternative assets focus are secure long-term bets for this specialist financial services firm.
Has MJ Hudson Group (LSE:MJH), a £63 million Jersey-based asset management consultancy, hit an inflection point – upwards – for its financial record?
Led by Matthew Hudson, MJ Hudson was founded in 2010 and calls itself “a one-stop shop, specialist service provider”. That it appears to be off radar to potential investors is a bit curious, considering it serves the funds industry; but it can be regarded as both an outsourcer and a legal adviser, so it’s not easy to conceptualise.
I recall similar indifference to Burford Capital (LSE:BUR) for a few years after this litigation finance company was the first of its kind to float; the stock subsequently took off after profits came in sharply.
Hudson seems unlikely to leverage earnings in a similar fashion, but the latest trading update affirms the momentum declared in November’s full-year results announcement to 30 June. Cross-selling of revenues, partly helped by acquisitions, has kicked in.
Revenue for this financial year to 30 June is set to be ahead of market expectations recently targeting £37.0 million, though this looked cautious given that £39.8 million was achieved in 2020/21, up from £22.3 million.
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Genuinely tipping into ‘underlying’ profit?
Hudson is one of those companies that stress underlying EBITDA – up 47% in its last year, to £5.8 million – and its sense of underlying pre-tax profit has “more than doubled” to £2.4 million.
But the June 2021 income statement did not for example break down £29.2 million of administrative expenses – or identify any items within that might justifiably be ‘normalised’ – on top of £24.5 million gross profit, which contributed to a £5.1 million operating loss.A £122,000 tax charge was down on £214,000 the previous year, but, at least potentially, HMRC has recognised an aspect of profit.
The 30 June balance sheet had £16.7 million of long-term debt, up from £873,000, with £2.5 million prior short-term debt mostly wiped out. But with cash down from £13.4 million to £9.8 million – £31 million having been raised at 59p a share in the December 2019 flotation – it looks as if debt is now part of the development approach, given the annual cash flow profile showed £3.0 million absorbed that had not been generated by operations (£4.7 million in 2019/20).
Not too surprisingly, investors have been in ‘wait-and-see’ mode which, combined with a risk-off approach to small caps during the second half of last year, saw this stock drop from 58.5p early last September to a post-flotation low of 36.5p on 27 January.
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Projections for a relatively small, AIM-listed company typically represent its CFO’s guidance to its broker, and Hudson (before this latest trading update) has apparently been content to see £3.7 million net profit targeted for this current financial year, then £4.5 million to June 2023. As ifthe forward price/earnings (PE) is 18x, easing to 15x with the stock currently at 41p.
That would be a massive shift from the accounted track record of losses, however, so I question what ‘normalised’ view may be involved. But I concur that this business ought to have a tipping point, and after Covid delayed various fund start-ups it is probably now.
Moreover, the CEO has regularly added to his stake since flotation; this now constitutes 22.7%, after a purchase of 37,500 shares at 41p following yesterday’s update.
Together with his wife’s share, worth nearly 5%, his accumulating equity implies confidence in a long-term game plan to develop and sell the business. I see a vague parallel with the £79 million Air Partner (LSE:AIR)currently being taken over by a US jets company. While most of Hudson’s work is in the UK, it has European and US offices, reflecting the fact that the US is the most vital asset management market globally.
‘Picks and shovels' approach has lower abject risk
Similarly, just as supplying prospectors proved the better bet in the Wild West gold rush, ancillary services offer scope to capitalise on growth in asset management.
Hudson’s strategy is to build a series of niche services where it has competitive advantage. Targeted clients are in the fast-growing “alternative investments” sectors, such as venture capital, property and hedge funds.
While this makes a lot of sense for growing revenue into profit, the conservative inside me notes that it currently benefits from the “everything” asset bubble that has expanded due to exceptional levels of monetary stimulus. Persistent inflation, a recession and financial crash could wipe away new entrants.
More positively, institutions have taken a long-term committed approach to alternative investments – partly because they are so wealthy nowadays – to diversify risk and keep with the times. Tritax Big Box (LSE:BBOX) – a property manager specialising in logistics assets serving the digital economy – is a success story I have drawn attention to, where institutions backed this manager in order to access the opportunity.
I am surprised that Hudson says it is diversified to the extent of over 1,000 clients “including 18 of the FTSE 100”, and unclear quite how these can all be asset managers unless they include some banks.
ESG principal driver of organic growth
Last November’s and this latest update affirm strong momentum, with “multiple new clients for various services” being achieved, as well as cross-selling and leveraging the breadth of services.
That does need to be the case, given that a note on segmental performance” from the June 2021 results shows the main driver for organic growth is the environmental, social and governance advisory business. This supported 30% organic growth within the data and analytics division, which represented 26% of the group’s underlying revenues.
Otherwise, acquisitions appear to be the chief contributor to the last financial year’s growth. Legal advisory revenue saw a 5% contraction, having been 7% down in 2020 (albeit reflecting Covid and other disruption).
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‘Outsourcing’, in other words operational and regulatory support for fund managers, enjoyed 51% growth due to the company’s acquisition of Bridge Consulting in Ireland, although organic growth reduced in the UK.
Other businesses in fund administration and regulatory solutions (which is to be moved into the outsourcing division) did see revenue growth and a reduction in their overall operating loss.
MJ Hudson Group - financial summary
Year end 30 Jun
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Turnover (£ million) | 14.4 | 22.6 | 21.2 | 22.3 | 39.8 |
| Operating margin (%) | 0.1 | -3.0 | -5.2 | -23.0 | -12.9 |
| Operating profit (£m) | 0.0 | -0.7 | -1.1 | -5.1 | 5.2 |
| Net profit (£m) | -1.3 | -2.2 | -3.6 | -7.5 | -5.4 |
| Reported EPS (p) | -0.7 | -1.3 | -2.1 | -5.6 | -3.2 |
| Normalised EPS (p) | -0.7 | -1.3 | -2.1 | -5.5 | -3.2 |
| Return on total capital (%) | 0.1 | -4.6 | -4.1 | -9.5 | -7.8 |
| Operating cashflow/share (p) | -0.8 | -0.8 | -0.8 | -0.9 | -3.6 |
| Capital expenditure/share (p) | 0.3 | 0.6 | 0.8 | 1.7 | 1.3 |
| Free cashflow/share (p) | -1.1 | -1.4 | -1.7 | -5.2 | -3.0 |
| Dividend per share (p) | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 |
| Covered by earnings (x) | -25.3 | ||||
| Cash (£m) | 1.0 | 0.5 | 3.1 | 13.4 | 9.8 |
| Net debt (£m) | 9.6 | 11.4 | 12.8 | -2.7 | 14.2 |
| Net assets (£m) | 4.2 | 5.3 | 7.8 | 40.7 | 37.2 |
| Net assets/share (p) | 2.5 | 3.1 | 4.5 | 23.8 | 21.6 |
Source: company accounts
A classic acquisitions-led plc emerging
Yes, there is a strategic and synergistic case for the merging of various such firms to achieve cross-selling. Funds support is a logical space to practise the ‘buy-to-build’ approach at the core of many successful plcs.
But be aware that acquisitions and an elusive ‘underlying' approach to defining profit – especially a focus on EBITDA – can blur less-than-exciting organic growth. In a people and technology-driven business it also means intangibles constitute 126% of Hudson’s net assets, despite the per share figure standing at a supportive 21.6p.
A maiden dividend of 0.125p was paid on 25 January and a progressive policy is intended; however, “the group’s primary focus is capital growth”.
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Hudson’s narrative is likely to remain strong, reflecting the vigour behind fund launches. Additionally, investors’ search for yield will continue whatever happens in equities; for example “more investment in real estate and infrastructure” is likely as governments try to stimulate growth, while renewables are seeing a boost” driven by concerns around climate change and ESG.
I think it is fair to add the caveat that if central banks struggle to contain inflation without significantly higher interest rates, and markets slide as a consequence, fund launches will get hit for a while. Without an established earnings record, Hudson equity is speculative.
Yet institutional investors should have the strength of long-term capital inflows to support the alternative assets industry Hudson serves, hence I conclude for the long term: Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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