Interactive Investor

The Financial Grimes: These shares are now looking cheap

This top City analyst reviews the financial sector stocks making headlines today.

20th September 2019 08:54

Jeremy Grime from ii contributor

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

  • Manolete (LSE:MANO) – AGM statement is reassuring with 60 new cases invested and 18 completed since March compared to 12 in H1 2018.

 

Smith & Williamson – Acquisition by Tilney 

Valuation £625 million

Smith & Williamson offer investment management, accountancy and tax advisory services.

  • Offer – The price of Smith & Williamson has been agreed with the private equity backed Tilney at £625 million. That represents 2.3X the (slightly dated) April 2018 reported turnover.  Or 12.6X Adjusted EBITDA.   
Mkt CapMkt Cap/EBITDAMkt Cap/Rev 
Brewin (LSE:BRW)95810.42.9 
Rathbone (LSE:RAT)*133814.64.3 
Brooks Macdonald (LSE:BRK)27412.32.6 
* PBT in place of EBITDA as it is a bank
  • Sector comps The stats below show the typical private equity traits of private equity for Tilney. High operating margins off the back of tightly controlled staff costs and a balance sheet that has been stripped to the bone (net debt £345 million).
TilneySmith & WilliamsonBrewinRathbone IM
Year EndDec 18April 18Sept 18Dec 18
AUM (m)23,00020,10042,80038,500
Clients (k)1006260
  
Revenue £m228.9266.7329275.3
Adjusted EBITDA £m87.449.4183.178.8
Costs £m177.1218.0252.3196.5
Staff Costs £m88.1157.5174.8104.2
  
Net inflows p.a2.50%2.80%3.70%3.40%
Average head count1133172217631296
  
Revenue yield on avg. AUM97.4132.679.376.3
EBITDA margin38.2%18.5%25.3%28.6%
  
Net debt345.1280 million NAV274 million NAV464.1 milion NAV
  
Staff cost/head (£)77,70091,48099,14980,401
AUM/head (£million)20.311.6724.2829.71
AUM/Client (k)230690642
Client/Head8835.246.3
Staff cost/other costs (%)49.7%72.3%69.3%53.0%
  
Offices55123015
  • Conclusion – I wonder if this combination could challenge the traditional models of Brewin and Rathbone, now their AUM are similar. Certainly it's easier to pay up when you can strip out the balance sheet while Brewin raised £60 million fresh equity last May for acquisitions. This may well put pressure on the traditional models. Certainly for Brewin, whose shares are looking cheap now they are down 20% from their January 2018 peak they run the risk of being a target.
Glossary
PBTprofit before tax
EPSearnings per share
DPSdividend per share
ROEreturn on equity
EBITDAearnings before interest, tax, depreciation and amortisation
PERprice earnings, or PE ratio
Yielddividend yield
FCFfree cash flow
NAVnet asset value
Price/Book (PB)a company's share price versus what it owns
Book Valuea company's worth after subtracting debts and liabilities from assets
AUMassets under management
FUMfunds under management
CULSconvertible unsecured loan stock
ARPUaverage revenue per user
OTCover-the-counter
FCAFinancial Conduct Authority
ESMAEuropean Securities and Markets Authority