The Financial Grimes: Interesting recovery stocks

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

• Equals Group (LSE:EQLS) announces a global partnership with Citi (NYSE:C), who will offer Equals' capabilities to 90 countries while using Citi's clearance and settlement capabilities to reduce transaction costs and enhance efficiencies.

• Arden Partners' (LSE:ARDN) interim results show a useful 20% revenue increase and a reduced loss but still at £1.6 million. In common with other brokers they refer to increasing M&A work and expect a "satisfactory" outcome.  Net assets are £7.4 million with cash of £2.6 million and £3.5 million of book assets.  Market Cap £5 million.

AJ Bell – Trading Update

Share Price 428p

Mkt Cap £1,748 million

Conflict Disclosure: No Holding

AJ Bell (LSE:AJB) is an online investment platform.

• Update AUA was up 7% over the quarter to £50.7 billion, driven by net inflows of 2.5% and market tailwinds.  Customer numbers were up 5%.

• Estimates are predicated on turnover growing 23% for the year to October 2019 . AUA at end September 2018 was £48.1 billion, so today are 5.4% ahead. 

• Valuation PER 57.1. Yield 1.1%

• Conclusion That valuation brings tears to my eyes. Good company and perhaps low liquidity has caused a crush in the doorway market.

CMC Markets – Trading Update

Share Price 96.1p

Mkt Cap £278 million

Conflict Disclosure: No holding

CMC Markets (LSE:CMCX) is an internet spreadbetting firm.

• Update. Q1 to June showed improved net operating income on a year ago, driven by higher revenue per active client and B2B revenues. Costs will be higher as previously guided, but the company is confident in meeting its PBT expectations for year to March 2020.

• Estimates. A 7% reduction in revenue is assumed for the year to March 2020. Q1 bodes well.

• Valuation PER 13.2X Yield 4.1%

• Conclusion These companies look like interesting recovery stocks as the dust settles on the regulatory intervention.  IG Group (LSE:IGG) and CMC have more professional revenue than Plus 500 and are more expensive (13.2X and 13.8X vs 6.5X for Plus), and all three are increasing their costs to take advantage of potential market share gain.  I suspect all three will do well. It depends on investors risk sensitivities as to which they prefer.

Intermediate Capital Group – Trading Update

Share Price 1,412p

Mkt Cap £4.1 billion

Conflict Disclosure: No Holding

Intermediate Capital Group (LSE:ICP) is a specialist asset manager.

• Update AUM up 4% to €38.6 billion with €2.1 billion new money raised in the quarter. Third party AUM up 5%. All funds are exceeding hurdle rate returns

• Estimates After last year's 29% AUM growth forecasts anticipate 42% EPS growth for the year to March 2020 which gives 90.2p

• Valuation Per 15.7X Yield 3.4%

• Conclusion The transformation of this business into a model driven by third-party fund management will enhance ROE and deliver a re-rating that isn't yet complete. With a strong niche in its area there is potential for a valuation increase as well as enormous potential to increase their scale.  If it was on 18X it would be 1,620p per share before further AUM expansion continues.

Brewin Dolphin – Trading Update

Share Price 315p

Mkt Cap £954 million

Conflict Disclosure: No Holding

Brewin Dolphin (LSE:BRW) is a wealth manager.

• Update Net inflows of £0.3 billion equates to 2.8% over the quarter, which contrasts with Rathbone Brothers (LSE:RAT) and Brooks Macdonald (LSE:BRK) both reporting outflows yesterday. Total AUM increased 4% to £44.1 billion in Q3. Both MPS and Financial Planning revenues grew above 20% while the acquisitions of Investec Ireland and Epoch wealth are on track to complete as expected. Outlook is confident in the model.

• Estimates Forecasts anticipate 2.5% revenue growth to September 2019 which compares to AUM up 4.2% from June 2018. Looks conservative

• Valuation PER 15.7, Yield 5.2%. EV/AUM 1.9%

• Conclusion Rathbone has £49.2 billion AUM and a market cap of £1.24 billion while Brewin has £44.1 billion AUM and a market cap of £954 million. Brewin is growing faster but Rathbones' 27% operating margin compares to Brewin's 22%. I find myself thinking Brewin's growth from new areas, alongside the recent acquisitions, is likely to make this a strong performer over coming years with a useful yield.

Mortgage Advice Bureau – Trading Statement

Share Price 604p

Mkt Cap £312 million

Conflict Disclosure: No Holding

Mortgage Advice Bureau (LSE:MAB1) offers mortgage advice in the UK from a network of over 1,250 advisers.

• Update : Revenue for six months to June grew 5% driven by a 13% increase in the number of advisers. As previously reported, housing transactions are taking longer to complete. Trading is in line with expectations. The acquisition of First Mortgage Direct will expand the number of advisers in H2.

• Estimates EPS to Dec 19 is expected to be 29.1p and dividend 24.9p

• Valuation PER 20.8, Yield 4%

• Conclusion Sensing that Buy to Let, Brexit uncertainty and the move in the switching market from two-year to five-year fixed rates would slow the market down, coupled with the change in dividend policy announced in June, I put the scrooge head on to see if there could be a warning coming by taking a look at the sensitivities. I reckon as long as they can keep expanding the number of advisers they will be OK. Perhaps that's why the acquisitions have been accelerating. It looks OK for now, but hard to see a catalyst on the upside.

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.