The Financial Grimes: 3 July 2019

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.

Randall & Quilter – Portfolio Transfer  

Share Price 180p

Mkt Cap £353 million

Conflict Disclosure: I hold

Randall & Quilter (LSE:RQIH) provide core services of legacy acquisitions and program management.

• News The company has a agreed to underwrite the liabilities of two Californian education insurers. The limit on the cover will be $113 million. The transaction has been effected by a portfolio transfer rather than an acquisition. The statement refers to this as a sizable acquisition and notes the company expects to announce a number of additional acquisitions during the rest of the year.

• Estimates No financial effect is given, although usually one would expect a profit to be effected when the portfolio is transferred. On Monday this week RQIH acquired a portfolio for $25 million when the net assets were $41 million. While profits on this type of business are not reliable or growing the returns are potentially high. The ROE estimated this year 20% but forecasts are flat into 2020.  These deals will put upside pressure on forecasts while the program management business is continuing to build a sustainable profit stream.

• Valuation PER 9.7X yield 5.3%

• Conclusion Following the sale of shares by Ken Randall and his move to Chairman the shares have been becalmed.  The profits are likely to be high this year but the shares are more likely to respond when the program management side of the business starts to deliver. 

Arbuthnot Banking Group – Portfolio Acquisition 

Share Price 1,335p

Mkt Cap £198 million

Conflict Disclosure: No holding

Arbuthnot Banking Group (LSE:ARBB) is a private bank

• Acquisition £258 million acquisition of a mortgage portfolios. £201 million have LTV of 67% and are 80/20 owner occupier/BuytoLet while the £65 million portfolio is all owner occupier and 70% LTV. The yield is 3.6%. 

• Estimates – If the companies makes a 1% return on these assets it could add 20% to the pretax forecast of £9.1 million for this year, which is expected to grow 27% from 2018.

• Valuation PER of 25X is high for a bank with a yield of only 2.9% when the ROE is only 4%. But it trades at net asset value.

• Conclusion Another step to scaling the loan book.  When it makes a 12% ROE it may trade at 1.5X book value. That would require profits of 3X this year's estimate.  So to own this share you need to believe forecasts are too low.  I am happy with that.

For information about Jeremy's 'deep dive' company analysis, you can email him at jeremy@charltonillingworth.co.uk

Jeremy Grime is an independent equity markets analyst and freelance contributor, not a direct employee of interactive investor.