The Financial Grimes: 4 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.

Mattioli Woods – Trading Update

Share Price 792p

Mkt Cap £212 million

Conflict Disclosure: No Holding

Mattioli Woods (LSE:MTW) is a leading provider of wealth management and employee benefit services 

• News Strong EBITDA and PBT growth is anticipated for the year to May 2019. That looks in line with forecasts.  Murray Smith is leaving the board but staying with the group while a new Risk and Compliance Officer is appointed alongside a new Group Finance Director.

• Estimates Forecasts anticipate £60 million revenue, £12.7 million PBT and 39.6p EPS with a dividend of  18.9p for the year to May 2019. That is modest revenue growth but 27% PBT growth following investment into the business.

• Valuation PER is 17.9X and yield 2.6%. ROE is 11.2%.

• Conclusion The company is well placed.  Unusually, this company has the ability to reinvest its earnings in acquisitions over time. Which is the reason it would be nice to see the ROE going up over time. That would be the trigger to make these shares expensive. In the meantime, they continue to look fairly valued as they have done for the last 12 months.

Quilter Plc – Strategic Review 

Share Price 145p

Mkt Cap £2.76 billion

Conflict Disclosure: No Holding

Quilter (LSE:QLT) operates in the wealth management industry

• News  Quilter confirms the stories that a strategic review is taking place regarding the Heritage life assurance business. No decision has been taken

• Valuation On a SOTP basis I can get to £3.6 billion but this is just having a stab. Methodology as follows:

• Advice and Wealth Management  – £373 million revenue. Financial planning – £1 billion AUM and £89m revenue – worth 3X revenue so valued at £267 million. Quilter Cheviot – £22.4 billion AUM yielding 72bps revenue – definitely worth 3% AUM – £672 million. Quilter Investors – advisory so lower quality but £17.8 billion yielding 59bps so must be worth 2% – £356 million.

• Platforms (£414 million revenue). Wealth solutions – £170 million revenue.  IntegraFin (LSE:IHP) trades at 32X PE and Nucleus (LSE:NUC) at 28X.  If we imputed a 40% margin we get £68 million and putting that on 30X after tax profit gives us £1.6 billion.  International –  £18.4 billion AUA and £135 milliom revenue.  This is probably worth a lower multiple as its margins will be lower.  If The UK platform is worth 9X revenue, let's say 5X revenue which is £675 million. May be a bit harsh here.  

• So value of business before the life business may be £3.57 billion, but there are £32 million of head office costs. If we put them on a post tax multiple of 15 that would reduce the valuation by £600 million so £3 billion. The life business has net assets of c£1 billion. And revenue of £109 million. That could be worth NAV but may be hopeful. Lets say £600 million.  So all in SOTP £3.6 billion.

• At the current price the PER is 13X. If they stayed as they are the £3.6 billion valuation would put the PER at 16.5X.

• Conclusion The company included the life assurance earnings within the Wealth Platforms division and the market has declined to value the company highly.  This may be a step towards releasing value, but I can't help wondering if the £32m central overhead is a large number that may tempt a competitor to step in and take a look at the whole group.

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.