The Financial Grimes: I can see 20% upside on this share

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.

Charles Taylor – Cash Offer 

Share Price 235p

Mkt Cap £183 million

Conflict Disclosure: No Holding

Charles Taylor (LSE:CTR) provides professional services to clients in the global insurance market.

• Offer – Cash offer of 315p is a 40% premium from a US private equity firm, Lovell Minnick.

• Valuation – The offer price represents a PER of 12.3X estimates 2019 earnings.  The company has average debt in the region of £60 million, a pension deficit of £28 million and deferred consideration of £10.9 million at Dec 18.  The EV is therefore £344 million, representing a respectable EV/EBITDA multiple of 8.9X.

• Conclusion – This looks like a good escape for shareholders. The price is not excessive but this complex business will have a limited number of buyers. While the buyers says they will support management I suspect a break up may be the result as there are global firms such as Cunningham Lindsay who would buy the adjusting business which has entirely different dynamics to the high ROE cash cow of the mutual business. A useful end to a 20 year path of value destructive acquisitions. I find myself wondering with the weak pound and low equity markets how many other companies will fall to overseas private equity.

IG Group  – Q1 Results 

Share Price 578p

Mkt Cap £2,137 million

Conflict Disclosure: I Hold

IG Group (LSE:IGG) runs a derivatives trading platform.

• Results – IG Group reports flat revenues on the prior year.  Driven by favourable markets in August and higher active client numbers. The company reports relative to the average quarter of last year as revenue declined over the year and states its performance relative to its stated targets of 3-5% core growth and £100 million from significant opportunities by 2022. Core grew 9% above the average of last year and significant opportunities delivered £19.9 million revenue in Q1.

• Estimates – Australian Regulation now causes a threat to forecasts but the guidance remains unchanged. Forecasts seek PBT of £178 million to May 2020 which is EPS of 39.2p.

• Valuation – PER 14.8X, Yield 7.5%. Net assets are £26m.  Currently there is no return on those assets. CMC trades at 14.1X and Plus 7.4X.

• Conclusion – There are cynics who doubt the performance of the companies targets, but this provides reassurance. Australia was 15% of revenue last year and this may come under pressure but I suspect all these companies will recover over time. 2022 forecasts are considerably lower than the companies guidance and the company trades at 11.4X the 2022 forecasts.  There may yet be upside on forecasts and in the meantime there is a useful yield.

Begbies Traynor Group – AGM Update 

Share Price 75p

Mkt Cap £93 million

Conflict Disclosure: No Holding

Begbies Traynor (LSE:BEG) specialises in corporate restructuring. 

• Update All areas have continued to perform well on the back of national insolvency appointments up 9% in the first 6 months of 2019. 

• Estimates Trading is in line with expectations for £8.5 million PBT and 5.5p EPS.

• Valuation PER 13.5X Dec 2019, yield 3.7%.

• Conclusion The ROE is increasing on the back of useful acquisitions while their markets are helping.  This company could have a good year or two ahead. Having raised £8 million in July the company could make further enhancing acquisitions. I can see 20% upside.

Gateley – AGM Update 

Share Price 166p

Mkt cap £184 million

Conflict Disclosure: I Hold

Gateley (LSE:GTLY) is a legal and professional services group.

• Results Trading in line with expectations.

• Estimates 21% PBT growth expected to £19.4 million and EPS 14p.

• Valuation PER 12.6X yield 5.2%.

• Conclusion This company rather prides itself on being dull which it is delivering on. Useful yield. I suspect the share price will follow the earnings.

Tungsten Corp Plc – Q1 Update 

Share Price 44p

Mkt Cap £56 million

Conflict Disclosure: No Holding

Tungsten Corp Plc (LSE:TUNG) provides e-Invoicing that offers supply chain financing and spend analytics. 

• Update Revenue in Q1 up 5% to £8.8 million which has delivered £1 million of EBITDA and an operating profit of £2.3 million. Cash is down to £2.2 million. Outlook is unchanged.

• Estimates PBT expectations for April 2020 are for £1 million PBT which looks light.

• Valuation £38 million revenue is expected in 2020, while the company has delivered an 11% margin in Q1. The company has the potential to make high margins given the platform nature of the business. It trades at 1.15X revenue.

• Conclusion  This company is looking dangerously like it has passed through the eye of the needle. While we can't discount entirely the possibility of an equity issue the valuation could double if the current improvements continue.