Interactive Investor

Insider: pair place big bet on boom industry 

1st February 2021 09:31

Graeme Evans from interactive investor

This company has stacks of potential, and it’s not just acquisitive directors saying it.  

Having established itself in the FTSE 250 index by doing the paperwork for private equity and hedge funds, Sanne Group (LSE:SNN) merits closer attention at this time of increased buy-out activity.

The company, which provides outsourced admin and corporate services for the alternative investment industry, said last week it had started the new year with good growth momentum and that medium and long-term prospects for its industry were “compelling”.

Rupert Robson, who has been chairman since 2015, backed up this optimism on Thursday when he bought £120,000 worth of shares in the company, his second major purchase in three months. Finance boss James Ireland also acquired £30,000 of shares at the same time.

Their purchases were made at between 565p and 570p, which compares with almost 700p in August and the low of 469p in March when activity slowed due to the Covid-19 pandemic.

The recent update suggests that trends are beginning to improve as private equity funds look to raise money to buy cheaper assets. Deals in the industry are coming thick and fast, with pubs company Marston's revealing on Friday a takeover approach from Platinum Equity Advisors.

Panmure Gordon analyst Robert Plant thinks the economic downturn will prompt a step-up in outsourcing activity as clients look to reduce costs. Their experience of home working in the pandemic may also lead customers to reconsider their in-house functions.

He has a ‘buy’ recommendation and believes that Sanne is well placed to take a bigger share of a growing alternative investment market, including through the acquisition of smaller players.

Sanne trades on 17.5 times 2022 earnings but Plant thinks there's potential for the shares to be worth 760p. Investec Securities noted last week that the valuation multiple is well below the long-term historical average of 24 times and for those of rivals JTC and MJ Hudson.

Investec has a price target of 780p, while US bank Jefferies is at 750p.

What you need to know about Sanne

Having started life in Jersey in 1988, the company joined the stock market in 2015 and secured promotion to the FTSE 250 index in March 2017, when shares were on their way to their highest ever level at more than 800p.

Currently valued at more than £800 million, the group employs some 1,800 people and administers structures and funds that have in excess of £250 billion of assets. There are high barriers to entry, given the specialist expertise required in alternative markets.

Sanne is also a cash generative business and paid an improved interim dividend of 4.8p a share to investors in October, despite the backdrop of Covid-19 uncertainty.

Its most recent update showed increased client activity converting into new business wins during the fourth quarter, leading to a figure of £22.5 million across the financial year. While this is 8% lower than 2019 following a decline of 31% in the first half of 2020, Sanne said the result provided “good growth momentum for 2021 and beyond.”

After Sanne forecast earnings per share in line with expectations in next month's annual results, Panmure Gordon kept its estimate of 25.4p and targeted 28.1p the following year.

The company added: “Sanne remains confident that the medium and long-term prospects for the industry are compelling and continues to focus on ensuring the group is well-placed to take advantage of the significant structural growth drivers in its markets.”

Has Softcat chairman sold at the top?

The £16.7 million sale of Softcat (LSE:SCT) shares by chairman Martin Hellawell and associates follows a 40% surge in the value of the IT infrastructure company since the start of December.

The FTSE 250 index stock hit a fresh record of 1,594p last month as strong demand from public sector customers has left it significantly ahead of where it expected to be at the end of 2020.

The disposal of 1.1 million shares was made by Hellawell and a family member, a family trust and a charitable trust, at prices of about 1,520p on Monday last week.

Hellawell still owns 2% of the company he joined in March 2006 and led onto the stock market in 2015. He switched from chief executive to chairman in April 2018 but is not involved in any operational matters other than as the “occasional sounding board” for CEO Graeme Watt.

Softcat's £3 billion valuation on Friday evening compares with £2.6 billion for rival Computacenter (LSE:CCC), the company that previously employed Hellawell for 13 years.

Marlow-based Softcat was founded in 1993 and has just delivered 15 consecutive years of operating profit growth. In December, shareholders were paid a special dividend of 7.6p a share to go with a final dividend of 16.6p a share.

Finance director Graham Charlton, who joined from in March 2015, also raised £900,000 from the sale of Softcat shares at a price of 1,508p on Tuesday.

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