The Financial Grimes: Three reasons why I like this share

by Jeremy Grime, an 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.

 

 

Litigation Capital Management – FY Results 

Share Price 86p

Mkt cap £97 million

Conflict Disclosure: No Holding

Litigation Capital Management (LSE:LIT) is a leading international provider of dispute financing solutions. 

  • Results Revenue of A$34.7 million (2018 H1 A$29.68 million). PBT adjusted A$12.28 million (2018 H1 A$12.9 million). EPS 8.07c (2018 H1 15.07c).  Cash receipts were A$26.8 million against deployments of A$27.8 million while the company has net cash of A$49.1 million. The pipeline consists of 64 opportunities. The company reports a ROIC cumulative sine 2012 of 135% and an IRR of 80%. Outlook is "excited".
  • Estimates This looks to be significantly above the A$9.5 million PBT I am seeing for consensus and in the year ahead to rise to A$14.9 million currently is showing. That is EPS of 10p for the year to June 2020. That looks far too low.
  • Valuation PER is 24.6X with a modest yield of 0.7% on estimates that are too low. NAV is A$76 million which is £42 million.  With an ROE above 42% perhaps this should trade at 3-4X book value which is £120 million-£170 million.
  • Conclusion I like this one for the three reasons that it has a higher ROE (42%) than comparators as well as not using fair value accounting and being at an early stage of deployment. . 

 

Nucleus- H1 Results 

Share Price 157p

Mkt cap £120 million

Conflict Disclosure: No Holding

Nucleus (LSE:NUC) is an award winning online wrap platform.

  • Results Revenue up 4% to £22.1 million which is derived from AUA up 6.9% and a modest reduction in revenue yield from 30.8bps to 30.2bps. PBT declined 7.3% from £4.9 million to £4.6 million as the EBITDA margin fell from 23% to 20.7%. The outlook refers to replatforming disruption amongst competitors and says that financial performance is expected to develop as planned. The company expects to deliver operating leverage over time.
  • Estimates FY PBT estimates at £6.8 million, EPS 7.3p

  • Conclusion These results look lacklustre. The flows may be lower than peers as investment has gone in in H1. The peers of AJ Bell and Integrafin are hugely expensive. I wonder if the cheaper play on the market drivers would be Tatton Asset Management.

Sanne – H1 Results

Share Price 572p

Mkt cap £834 million

Conflict Disclosure: No Holding

Sanne (LSE:SNN) provides administration, reporting and fiduciary services.

  • Results Revenue up 19.5% to £78.7 million. PBT down modestly at £19.2 million. EPS down 7.1% to 10.4p.The decline in operating margin to 26% is now unlikely to be recovered in H2, so the full year margin is now expected to be between 28% and 30%. The outlook is excited about new business wins while they have work to do improving the margins.
  • Estimates FY PBT estimates at £45.3 million, EPS 24.5p. These are likely to come down modestly
  • Valuation PER 23.3X Yield 2.3%
  • Conclusion Expensive when the company has failed to deliver the hoped for operating efficiencies. This looks like downgrade number 2. Usually they come in threes.

 

SimplyBiz – H1 Results 

Share Price 199p

Mkt cap £193 million

Conflict Disclosure: No Holding

SimplyBiz (LSE:SBIZ) provides comprehensive, market leading Compliance and Business Support to directly authorised advisers in the Financial Services sector.

  • Results Revenue up 20% to £29.1 million. Adjusted EBITDA up 30% to £6.8 million. Adjusted EPS up 8% to 5.52p. Net debt £30.1 million. Outlook is said to be "in line" and the company is on track to meet expectations. Organic growth is calculated at 5%.
  • Estimates FY PBT is estimates at £14.8 million, EPS 12.6p
  • Valuation PER 15.8X Yield 2.8%
  • Conclusion The pre close trading statement said management was "confident" in full year expectations and this word is repeated today. The shares have come back from their 240p high in June and look reasonable value.

 

Urban Exposure – H1 Results 

Share Price 44p

Mkt Cap £70 million

Conflict Disclosure: No Holding

Urban Exposure (LSE:UEX) provide development finance loans to experienced property developers.

  • Results At 9 September new committed loans are £97.5 million, up from £54.3 million at June. Pipeline is now £1 billion of which £666 million is in due diligence. Revenue, which lags was £5.3 million which was the same as the operating costs of £5.3 million. H2 is traditionally a busier period so the outlook statement says they are confident of meeting market expectations.
  • Estimates While the embedded value is growing the company isn’t expected to report a profit until 2021. With break even in H1 this looks a very conservative estimate.
  • Valuation It is too early to value this on a PER but with net tangible assets of £135.2 million, the majority of which is loan book over 5 years the valuation is enticing when the average unlevered IRR is above 11%.
  • Conclusion Sadly few fund managers can take a 5 year view but for those that can exciting returns are on offer.

 

 STM Group – H1 Results 

Share Price 40p

Mkt Cap £24 million

Conflict Disclosure: I Hold

STM Group (LSE:STM) provides independent fiduciary services and asset structuring to high-net-worth individuals and corporate institutions.

  • Results Underlying Revenue up 7% to £11.6 million.  Underlying PBT down from £2.1 million to £1.6 million as the margin declined from 23% to 20%. The company has been investing in senior hires and IT infrastructure and the outlook says the second half is about concluding the initiatives started in H1 and they have strong expectations of a revenue and PBT uplift as a result of recent investment. Gross cash is £18.1 million.
  • Estimates The £4.4 million PBT expectation as I understand it includes the one off gains, so these results look to be in line with expectation with the company reporting £3.4 million of PBT in H1.
  • Valuation This is a year of one off gains and costs. Looking at 2020 forecasts anticipate £4.7 million PBT, which is 6.2p EPS and a 2.4p dividend. That's a PER of 6.5X and a yield of 6%.
  • Conclusion  Cheap as it comes with a year of investment while the company is becoming a more UK focussed business.  Next year this could perform very well once the costs of extra infrastructure are fully embedded.
Glossary
PBT profit before tax
EPS earnings per share
DPS dividend per share
ROE return on equity
EBITDA earnings before interest, tax, depreciation and amortisation
PER price earnings, or PE ratio
Yield dividend yield
FCF free cash flow
NAV net asset value
Price/Book (PB) a company's share price versus what it owns
Book Value a company's worth after subtracting debts and liabilities from assets
AUM assets under management
FUM funds under management
ARPU average revenue per user
OTC over-the-counter
FCA Financial Conduct Authority
ESMA European Securities and Markets Authority

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.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

get more news and expert articles direct to your inbox
Sign up for a free research account and get the latest news and discussion, and create your own Virtual Portfolio