The Financial Grimes: This valuation looks opportunistically low

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.

AFH Financial- Acquisitions   

AFH Financial (LSE:AFHP) offers independent financial advice and investment management to individuals and businesses

Share Price 276p

Mkt Cap £118 million

Conflict Disclosure: No Holding

• Acquisitions – Two are announced this morning. Mulberry IFA's in Twickenham and AE Garment IFA's in Hemel Hempstead. Combined max consideration is £7.2 million.  Mulberry has four advisers and the consideration of £5.3 million represents 3.1% of the £170 million AUM.  Garment consideration of £1.9 million represents 4.2% of the £45 million AUM.  The company updates that double-digit inflows continue with low redemptions.

• Estimates Not material to estimates. If we assumed (possibly heroic) the revenue yield on the AUM was 60 basis points, that would be revenues of £1.3 million which is 1.5% of the estimates revenue of AFH this year. IF this was the case, the acquisition multiple would be 5.5X recurring revenue which is too high, so perhaps the AUM is a poor guide. 

• Valuation The shares have fallen 25% since July and now trade on a PER of 13.3X and yield 3%. If we include the CULS the EV/Revenue is c 1.7X which is lower than it is possible to acquire companies for.

• Conclusion The share price has behaved as if the issue of £15 million 4% CULS in July implied the company has exhausted the pool of buyers of the ordinary shares. The CULS were issued at £5,000 and currently trade at a discount (£4,750).  The conversion price on the CULS is 420p, while the equity is now trading at 420p.  The worry is that with their acquisition currency now drying up, the model could unravel. However,  I think the company may have reached sufficient scale now to generate cash flows which it can reinvest at c. 13% ROCE, as long as they don't overpay.  The valuation looks opportunistically low if they haven't overpaid today. On the disclosed information it is possible they have.

Gateley – Earn Out  

Share Price 163p

Mkt Cap £181 million

Conflict Disclosure: I hold

Gateley (LSE:GTLY) is a commercial law firm

• Earn Out – £1.25 million is payable for deferred consideration on the 9 July 18 acquisition of Kiddy & Partners. This is calculated at 4.5X EBITDA. The statement says the aggregate maximum remaining payment outstanding is £365k. Which makes £850k paid at acquisition, £1.25 million now and £365k outstanding, so a total of nearly £2.5 million.  The consideration was capped at £3 million for the period up to 2021 which I am therefore struggling to square with the commentary which says Kiddy has grown 37% ahead of original expectations.

• Valuation PER 12.3X, Yield 5.3%

• Conclusion The statement looks a little more bullish than the numbers suggest.  The announcement also includes the wrong date of 9 July 2019 for the Kiddy acquisition which was in 2018. That's OK, but they are lawyers.  It's cheap but not sure this is a positive announcement.