Interactive Investor

Stockwatch: A geared play to follow

27th January 2015 09:46

Edmond Jackson from interactive investor

Miton Group (MGR), a mainly "retail" asset manager, is an interesting recovery play with lessons about the mercurial nature of fund management. Its AIM-listed shares have plunged from about 50p a year ago, recently as low as 19p, after the company lost a third of its assets last year due to a business sale and the retirement of a key fund manager provoking the loss of an institutional mandate.

However, the chairman added 80,000 shares at 21.88p and a non-executive director 110,000 shares at 21p, and the price is up to 25p after a latest trading update, indicating a "major improvement in performance (that) has gradually reversed the trend in redemptions and will bring renewed inflows in time."

Low interest rates continue to support demand for stocks

At end-2014 there were £2.1 billion assets under management, the group having attracted £708 million gross inflows during the year. For 2015 there is a wider range of funds "well-placed to deliver attractive returns for addition we are developing initiatives to set up new funds with distinctive Miton strategies."

Stocks/funds have been a rewarding asset class in recent years, partly due to quantitative easing, and 2015 has started well. Sentiment can obviously change and it remains to be seen whether deflation supports global consumer demand or ultimately leads to another debt crisis. If the fears are overdone then the search for yield amid low interest rates means capable asset managers are well-placed to benefit.

Miton Group - financial summary
Co. broker estimates
Year ended 31 Dec 2009 2010 2011 2012 2013 2014 2015
Turnover (£m) 17.5 20.4 21.4 22.3 28  
IFRS3 pre-tax proft (£m) -2.3 -1.3 -0.4 0.9 0.7  
Normalised pre-tax profit (£m) 0.1 -2.2 0.7 0.9 1.8 5.2 3.6
Normalised earnings/share (p) 0.6 -3.5 0.8 0.6 1.1 2.5 1.7
Price/earnings multiple   (x)         22.7 10.1 14.9
Cash flow per share (p) -2.7 6.4 -0.03 2.2 3.1
Captial expenditure per share 0.05 0.15 0.1 0.02 0.18  
Dividend per share   (p) 0 0 0.4 0.45 0.54 0.6 0.75
Yield (%)  2.1 2.4 3
Covered by earnings (x) 2 1.4 2 4.2 2.3
Net tangible assets per share (p) -32.6 -27.1 3.2 5.9 1.8
Source: Company REFS.

At about 25p, Miton shares trade on 15 times the company broker's projection for 2015 earnings per share (see table) although in the medium term EPS can grow and the multiple reduce if Miton increases its inflows.  "The business is focused on achieving assets under management growth in the current year."

Fund ratings may need to improve however

A key fund - the £421 million CF Miton Special Situations - remains in the fourth quartile of its sector with a 1.7% return against a 5.6% average over 2014. The smaller companies fund did very well in 2013 but as I have noted with more enterprising stocks, 2014 was characterised by consolidation or falls, hence the fund more recently drifted. Gervais Williams, the Miton Group managing director (and manager of several funds) is rated A, slightly down on AA during 2014.

He is generally regarded as a safe pair of hands having been head of small caps investing at Gartmore, although that company itself had a troubled 15-month stockmarket history as (other) star fund managers ran into controversy - prompting departures. Williams arrived here at end-2010 as part of a new top management who raised £20 million at 33p a share to redeem preference shares, repay bank debt and enable restoration of dividends. The group was then called MAM Funds but has undergone various name-changes: previous to that it was Midas Capital which got into trouble during the 2008 financial crisis, squeezed between fund redemptions and debt.

Following a March 2008 merger it had £2.8 billion under management versus a £40 million bank loan, but by end-March 2009 the funds had dropped to £1.9 billion. So over some six years this operation has pretty much “returned to go” in terms of assets under management, with three name changes, also the current executive chairman and managing director have been in place for four years. It’s a convoluted record that needs to settle to stable progress.

Cash balances support a modest dividend

The prospect of "a good and growing dividend" is entertained although cash balances of £16.2 million up from £12.5 million relate substantially to £4.2 million proceeds from a business sale (as shown in the 2014 interim results' cash flow statement) and the prospective yield up to 3% is not really a prop. If the shares continue to recover in the medium term then this may be the best yield to expect; valuation is therefore largely about the group's earnings dynamic and how it should be rated.

Inevitably the price/earnings (P/E) multiple will expand and contract with stockmarket cycles, also the managers' track record. At end-2013 the stock had soared to 51p having started that year at 22p, with markets buoyed by QE and looking to asset managers as a geared play: the P/E multiple was then about 50 times as expectations ran high. Indeed, a trading statement one year ago reckoned the group was "well-positioned for the coming year with accelerating momentum" despite a £450 million disposal due.

Updates continued satisfactorily enough, but the stock was drifting, similarly to other "high beta" plays (stocks more volatile than the market). The 25 September interim results then revealed £183 million net outflows from defensive funds and 3 October brought news of a £325.6 million loss of client mandate due to a manager retirement. Arguably such setbacks were modest in context, but they coincided with markets fretting over macro issues - hence Miton de-rated to a less demanding P/E.

Risk/reward profile has therefore improved

If the current management can deliver good progress in this low interest rate environment then it should support demand for CF Miton funds; and this type of business is operationally geared where revenue change quickly impacts profit. At about 25p the stock has a better risk/reward profile, and the balance sheet has no debt if typical of a "people business" with £39.4 million goodwill in context of £50.1 million net assets. Earnings are key, yet Miton stands a fair chance of a better 2015. Gervais Williams owns 5.2% of the group so should be motivated to deliver long-term value.

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