Interactive Investor

Stockwatch: What to do with this AIM star?

5th October 2018 09:46

Edmond Jackson from interactive investor

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Up over 80% since his last update in March, successful companies analyst Edmond Jackson tells us whether this share remains a momentum buy or whether it's time to trouser profits.  

Should record results from asset managers be treated with caution, or a signal that their stocks are a momentum buy? Miton Group, a £120 million AIM-listed fund manager, is storming this year – from 37p to 76p, or from 25p when I originally drew attention in January 2015, along a rationale the maturing bull market would favour a specialist small cap equities manager and operational gearing boost its profits.  

This is underlined by latest first-half 2018 results which showed adjusted pre-tax profit up 51.7% to £4.4 million on net revenue up 24.3% to £12.8 million. Operating margin rose from 24.3% to 26.4% (adjusting for amortisation and exceptionals). 

Great times, nay, for asset management?

Once the costs of establishing people/IT/offices/regulation are covered, then unless managers insist on a greedy compensation scheme, fund sales in a benign environment mean revenue drops through impressively to earnings - and if the fund-holders stay put, earnings from management fees are high quality.  

A contrarian view would be: a small-cap equities manager with booming results that's recently extended into highly-valued US stocks, is an indicator to take profits (and generally, in stocks).  

Then again, if you heed latest words from the new chairman of the US Federal Reserve, the upswing in equities (led by the US, as ever) has plenty to go.  On 3 October he declared:

"A remarkably positive set of economic circumstances means there's no reason to think this cycle can't continue for quite some time, effectively indefinitely." 

Just mind how the American economist Irving Fisher proclaimed, ahead of the 1929 Wall Street Crash, the stockmarket had reached "a permanently high plateau".  

Risk/reward is rising in all respects

When things go well in this industry, asset-gatherers tend to outstrip any cautious expectations lingering.  It looks as if market expectation (see table) for £7.1 million normalised pre-tax profit this year is way too low, and flat profits in 2019 just plain wrong; I’d target about £9 million pre-tax profit this year and a decent advance in 2019 also, unless a market slump stalls demand for funds and prompts redemptions.  

Earnings per share of 6p, trending higher, looks likely if stocks retain their poise and the Bank of England continues to fret about Brexit, thus keeping interest rates low. So, savers and small-scale pension planners would continue to look to equity funds, hoping to offset risk with multi-asset type funds (including bonds) also.  

A bull case for the likes of Miton also extends to the stock's rating.  For example, if EPS of about 6p is a fair medium-term target, then at 76p the prospective price/earnings (PE) multiple is just shy of the teens. Hardly pricing in the kind of growth that could happen, though I believe risk is increasing too, along with potential reward: both market risk in terms of equities, and company-specific risk unless Miton does more to evolve its reputation from a small cap equities specialist.  

If markets do turn down, small caps usually come off worse: not only because they are more vulnerable to recession than larger firms, but crucially a shift in investors' liquidity preference.  People tend to want "out" of small-cap and the market can de-rate the entire sector, in anticipation.  If funds meet with significant redemptions, managers may have to choose between a steep discount to ditch stocks that have hit snags, or sell more liquid quality stocks. 

Financial advisers tend to counsel private investors to ride through market volatility, even add to holdings.  Yet since 2008, the stockmarket's various rebounds from sell-offs have benefited from years of exceptional central banks' stimulus.  After cutting interest rates so low and swelling their balance sheets from QE, what means do they have to cope with any surprise downturn?  Not surprisingly the Fed is trying to normalise interest rates as quickly as it can, time will tell if it succeeds. 

Seven consecutive quarters of positive net inflows

There's company-specific risk in the way Miton remains chiefly equities-oriented.  Year-on-year to last June, assets under management are up 35.3% to over £4.5 billion, within which equities have risen from 62.2% of the total to 66.6% over the H1 2018.  Multi-asset funds constitute 20.5% and the remainder investment trusts, but these are likely also to significantly involve equities.  

Miton's aim to broaden its funds offering appears to be working in the sense that three UK sectors saw net outflows in H1 2018 (though altogether UK strategies had positive net flows), while "our US and European strategies saw good inflows" as clients diversified. 

"Over the last three years we have launched four new funds, including US smaller companies and balanced multi-assets in H1 2028.  We were selected to run a sub-diversified mandate for a major UK wealth manager who re-launched their managed portfolio service."

I have also previously noted how Miton diversified to offer a global infrastructure income fund, and multi-cap income.  All such are good for so long as equities enjoy broad support, where 'buy the dips' applies.

Are Continental European and US (small cap) equities a useful means to mitigate investment risk?  The EU probably has as much to lose as the UK from a No Deal Brexit, and if US tax cuts prove only a fleeting blip to corporate profits – instead mainly boost inflation, the classic late-cycle risk – then materially higher US interest rates will poop equities globally.
  
IFA's counselling a "multi-asset" approach could help demand for such funds in the near term.  But if it comes to a crunch, the lesson of 2008 was all assets bar cash, being hit.

So, Miton is well-positioned if current trends continue, though I wonder about the choices offered to cope with change.  For example, say you want to hedge UK equities and sterling risk in the event of No Deal Brexit, as US interest rates rises push up the dollar, then a US dollar Exchange Traded Fund from the likes of Invesco – a more diversified fund manager – might be one such tool. 

Miton Group - financial summary           Broker estimates
year ended 31 Dec          
  2013 2014 2015 2016 2017 2018 2019
Turnover (£ million) 28.0 27.0 22.0 24.1 27.8    
IFRS3 pre-tax profit (£m) 0.7 -5.5 2.1 4.3 6.2    
Normalised pre-tax profit (£m) 1.8 6.8 2.5 4.9 6.8 7.1 7.1
Operating margin (%) 6.1 24.9 11.0 20.1 24.4    
IFRS3 earnings/share (p) 0.5 -3.0 0.8 1.9 1.9    
Normalised earnings/share (p) 1.1 4.6 0.9 2.3 3.2 4.2 5.2
Earnings per share growth (%) 82.0 314.0 -80.0 147 42.5 31.1 23.3
Price/earnings multiple (x)         23.4 17.9 14.4
Historic annual average P/E (x) 54.8 37.2 5.5 29.4 16.8 16.3  
Cash flow/share (p) 3.1 2.0 0.7 5.6 3.9    
Capex/share (p) 0.2 0.1 0.0 0.0 0.0    
Dividend per share (p) 0.45 0.54 0.60 0.67 1.0 1.9 2.4
Dividend yield (%)         1.3 2.9 3.6
Covered by earnings (x) 2.6 9.5 1.9 3.8 2.3 2.2 2.2
Net tangible assets per share (p) 1.8 8.3 9.4 11.1 10.3    

Source: Company REFS            Past performance is not a guide to future performance

Mixed upshot for trading tactics

One reason I'm updating is because I argued 'Add' the stock at 42p last March after prelims.  Miton has risen 81% in six months and paid a 1.4p per share dividend.  Its prospective yield is currently about 3% or higher: fair but no prop.

So, if equities' risks are rising, then it's wise to consider locking in (some) gains.  Or, if you trust Professor Robert Shiller saying "US stocks are expensive but the market could carry on rising for years", along with the bullish Fed chairman, then watch Miton as a medium-term "momentum buy" – lest its market price dips.  

I tend towards wealth protection hence, without asserting an overt 'sell' stance, believe it's prudent to: Take Profits.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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